4-hour timeframe
Technical details:
Higher linear regression channel: direction - downward.
Lower linear regression channel: direction - downward.
Moving average (20; smoothed) - downward.
CCI: -116.6766
The EUR/USD currency pair starts in a continuing downward movement on Thursday, May 7. Thus, the trend for the pair remains downward, but all the downward movement can end near the Murray level of "0/8"-1.0742. However, before this, you first need to reach and work out this level. Traders spent the entire third trading day of the week in a completely calm manner, which does not allow us to conclude that there was any unrest in the market. Even in the European session, the pair's quotes resumed falling, but in the American session, the downward movement stopped. Daily volatility was only 64 points, which is one of the lowest values for the last thirty trading days.
For the past two trading days, the community of traders has been discussing only one topic. This is not the topic of a possible new conflict between China and the United States, nor is it the topic of "coronavirus". Quite unexpectedly, it turned out that the European Central Bank, when it repurchases securities of various states, doing this as part of the European economic stimulus program, or simply pumps up the economy with liquidity in times of crisis, may violate EU law, which prohibits direct financing of the debts of the member states of the alliance. On May 5, the German Constitutional Court ruled that the ECB exceeded its powers when it bought back about 2 trillion euros over the past five years. Now the European Central Bank needs to prove within three months that the program of repurchase of government securities was legal and did not contradict the principles of the European Union. Many analysts and traders hurried to write off the euro immediately after receiving this information, at the same time explaining the fall in the quotes of this currency in the last few days by the decision of the German court. However, we believe that the situation here is exactly the same as with the topic of Brexit, as with the topic of the trade war between China and the United States. This is such a large-scale event that it is unlikely to be reflected on the currency chart for several days. In other words, you should not expect that the euro currency will now go to parity with the dollar because of this court decision. Yes, this event threatens another batch of problems for the Eurozone. Most of which may be related to certain problems in the financing of European States now, in times of crisis, when financial support is needed most, as well as in the future. And for many European countries, especially in times of pandemic and crisis, the lack of funding will amount to bankruptcy. However, so far there is no decision prohibiting the European regulator from repurchasing securities. Moreover, the ECB has three months to at least hedge its bets and expand the European stimulus program even further. Or to provide assistance to all states that may be bankrupt, until the final verdict of the court. In any case, the ECB has time. We also do not believe that the ECB does not have any options. It is possible that the organization led by Christine Lagarde will be able to prove the legality of this program. However, problems with expanding the existing asset purchase program (PEPP) may still occur. And it is within the framework of this program that the ECB can really make claims since the purchases of securities from various countries were disproportionate and were not limited to 33% of each country's debt. At the same time, the German court ruled: "The decision published today does not concern any financial assistance measures taken by the European Union or the ECB in the context of the current coronavirus crisis." However, most European political analysts now agree that in the future, legal proceedings may also affect the PEPP program.
In general, this topic is complex and serious. For the euro currency, this is not a blow at this time, but only a bell. Recall that one of the main mandates of the ECB is the stability of the euro currency. The Bundesbank has not yet been obliged to sell securities purchased for more than 500 billion euros, and many economists also believe that the ECB will easily resolve all problems with the German Central Bank. Therefore, from our point of view, this topic does not threaten the euro/dollar currency pair with absolutely nothing. And in the next three months, when the ECB will work on proving the legality of the quantitative easing program, it is unlikely that traders will get rid of the euro based on this event.
Christine Lagarde is scheduled to speak in the European Union on Thursday, May 7. Even at the beginning of the week, this speech was not on the calendar of events, so we can assume that the speech will be dedicated to the first stage of the ECB's defense against the attacks of the German court. At least, the head of the ECB can explain to the markets whether there were any violations during the bond repurchase program. In addition to the speech by Christine Lagarde, Germany will publish today the value of industrial production for March with a forecast of -7.5% in monthly terms. Also scheduled for today is a speech by ECB Vice-President Luis de Guindos, who will also not be able to pass by the German court's decision and will also comment on it. In the afternoon, the next report on applications for unemployment benefits in the US will be released with a forecast of +3 million. The total number of secondary applications for unemployment benefits may grow to 20 million. These are all the planned statistics for May 7.
We would like to return to the fact that technical factors remain the most significant when predicting the movement of the euro/dollar currency pair. We would like to draw the attention of traders to the fact that we talked about a very likely fall in the euro currency from the level of 1.1000 at the weekend and even earlier when nothing was known about the decision of the German court. The reasons are simple. The pair is probably now inside a fairly wide side channel, limited by the levels of 1.1000 and 1.0750. Thus, from its upper limit, and at the same time the psychological mark of $ 1.10, the downward movement was highly expected. And now, the pair's quotes are getting closer to the lower border of this channel, so a rebound with a turn upward may follow from the level of 1.0750. However, it is possible that traders will be able to withdraw the pair from the side channel, and only then it will be possible to talk again about the impact of the fundamental background on the pair's movement. So far, we believe that macroeconomic statistics do not have any impact on the currency market. Even the most important and significant reports. Thus, we should wait for further developments. Sooner or later, traders will start paying attention to statistical information.
The average volatility of the euro/dollar currency pair as of May 7 is 94 points. Thus, the indicator has increased slightly and now its value is characterized as "strong". Today, we expect quotes to move between the levels of 1.0717 and 1.0905. A reversal of the Heiken Ashi indicator upward may signal a round of upward correction.
Nearest support levels:
S1 – 1.0742
S2 – 1.0620
S3 – 1.0498
Nearest resistance levels:
R1 – 1.0864
R2 – 1.0986
R3 – 1.1108
Trading recommendations:
The EUR/USD pair continues to move down. Thus, traders are now recommended to sell the euro currency with the goals of the Murray level of "0/8"-1.0742 and the volatility level of 1.0717 before the Heiken Ashi indicator turns up. It is recommended to consider buying the euro/dollar pair not before the price is re-anchored above the moving average line with the goals of 1.0905 and 1.0986.
Explanation of the illustrations:
The highest linear regression channel is the blue unidirectional lines.
The lowest linear regression channel is the purple unidirectional lines.
CCI - blue line in the indicator window.
Moving average (20; smoothed) - blue line on the price chart.
Murray levels - multi-colored horizontal stripes.
Heiken Ashi is an indicator that colors bars in blue or purple.
Possible variants of the price movement:
Red and green arrows.
The material has been provided by InstaForex Company - www.instaforex.com