As the stars aligned, the euro climbed for the fourth day out of five to near a four-week high.
Monetary Policy Decision
The 25 members of the governing council of the European Central Bank (ECB) unanimously decided to raise interest rates by 75 basis points (bp) at its last meeting. The decision lifted the rate from zero to 0.75%—its highest level since 2011. ECB President Christine Lagarde said there would be "several" more increases.
Monetary Policy Rhetoric
Joachim Nagel, president of the Bundesbank, said in an interview with German radio over the weekend that "additional decisive steps must follow" if the situation with consumer prices doesn't change. According to Reuters, ECB policymakers are increasingly concerned that the critical rate will need to rise to 2% or more to stop record inflation in the Eurozone.
Easing U.S. Dollar: Inflation And Profit-Taking
The dollar fell for the fifth straight day to a near-four-week low. Fundamentally, stocks have been gaining ahead of today's U.S. inflation report which is expected to show tempering prices. Technically, the same theme drove profit-taking in the dollar after an aggressive Fed pushed the U.S. currency to a two-decade high.
Geopolitics
Recent Russian losses in Ukraine may be the catalyst for a reversal in the war momentum. If that scenario plays out, the euro may strengthen, after being the most liquid short since the Russian invasion, weighing on the single currency—already at an interest rate differential disadvantage—and pushing it towards parity with the dollar.
However, the supply-demand balance warns of being long just yet.
Yesterday the euro was up 1.6%, but still well off its highs despite the expectation of tempering U.S. inflation and recent hawkish comments from the ECB.
Moreover, the price stopped precisely at the top of its falling channel. Today's advance has not even neared yesterday's high, underscoring the resistance. Above that, broken support turned resistant.
Trading Strategies
Conservative traders should wait for a long red candle for added confirmation of consistent supply. Then, they should wait for the price to retest that resistance before risking a short position.
Moderate traders would be content with the long red candle, provided they can withstand the potential resistance retest.
Aggressive traders could short now, taking advantage of the price proximity to the channel top and yesterday's high.
Trade Sample - Aggressive Short
- Entry: 1.020
- Stop-Loss: 1.030
- Risk: 100 pips
- Target: 1.00
- Reward: 300 pips
- Risk-Reward Ratio: 1:3
Author Note: I am not in the business of fortune telling. I am only presenting you with my interpretation of technical analysis. The discipline is not magic but is a product of statistical studies. There is no way of knowing whether supply and demand will follow the same behavior this time. Trading success is measured by overall results, not on an individual basis.
Professional traders work with a plan. Otherwise, you're gambling. Your plan should incorporate your timing, budget, and temperament. However, if you don't know how to do that, you may use the following generic sample if you have a high-risk aversion and understanding that you do so for practice, not profit, or you'll end up with neither. Guaranteed. No money back.