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Daily Market Analysis From Forexmart.eu

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The Fed promises to continue raising the rate, but the market no longer believes

Today, January 12, Thursday, the US dollar dropped significantly once more. Let me remind you that last Friday, reports on the unemployment rate, the labor market, and business activity were released in the United States for the first time in 2023. 223 thousand people were employed, the unemployment rate declined to 3.5%, and the ISM index unexpectedly went below the 50.0 level. Generally speaking, the only ISM index that is detrimental to the dollar is the one for the services sector. The remaining news is all favorable in my opinion, but the demand for the US dollar is still down significantly. The demand for the dollar was steady at the start of this week, but today data on inflation in the United States was released, which did not appear to startle the market but sparked a strong reaction. The market anticipated a decrease in the consumer price index of 6.5% y/y, which exactly happened. The market also anticipated a 5.7% y/y decline in the base index. There were no additional significant occurrences today.

It turns out that although both results from the same report were almost exactly in line with predictions, the demand for US dollars nonetheless decreased, preventing both instruments from starting (or continuing) to build the correction portion of the trend. It is vital to note that the subsequent activities of central banks, in this case, the Fed, are more significant than inflation itself. Michelle Bowman, one of the FOMC's voting members, recently predicted that the rate will increase because inflation is still too high. At a Florida event, Bowman stated, "I believe we can cut inflation without a big economic slump as the jobless rate continues at its historic lows. Other FOMC members had previously argued for the continuation of monetary policy tightening. However, the market appears to be responding that all interest rate increases have already been fully absorbed by the US dollar's constantly declining demand. The rate is anticipated to climb to a maximum of 5.5% by the market, though it may be lower following today's inflation report

It is important to keep in mind that the demand for the currency is supported by a tighter monetary policy. Therefore, as expectations for the rate decline, so does the demand for the currency. Therefore, from a wave perspective, I continue to anticipate the development of downward trend sections. Despite their significant length and complexity, the market indicates that it is willing to build upward segments. Only figures on British GDP, European and British industrial production, and the American University of Michigan's consumer sentiment index are available this week. The recession in the UK has reportedly already started, thus the most significant GDP data is likely to show a decrease. If this is the case, it would be difficult to predict that the GDP will increase over a single month.

I conclude that the upward trend section's building is about finished based on the analysis. As a result, given that the MACD is indicating a "down" trend, it is now viable to contemplate sales with targets close to the predicted 0.9994 level, or 323.6% per Fibonacci. The potential for complicating and extending the upward portion of the trend remains quite strong, as does the likelihood of this happening.

The building of a downward trend section is still assumed by the wave pattern of the pound/dollar instrument. According to the "down" reversals of the MACD indicator, it is possible to take into account sales with objectives around the level of 1.1508, which corresponds to 50.0% by Fibonacci. The upward portion of the trend is probably over, however, it might yet take a lengthier shape than it does right now.

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EUR/USD and GBP/USD trading plan for beginners on January 17, 2023

Details of the economic calendar on January 16
The economic calendar was traditionally empty on Monday. No important reports were published in the EU, the United Kingdom, and the Unites States.

Martin Luther King Day was celebrated in the United States. For this reason, banks, funds, and stock exchanges were closed.

Analysis of trading charts from January 16
EURUSD reached the 1.0800 level during the pullback stage, where there was an amplitude move within 70 pips. In fact, the market remains in an upward mood, otherwise there would be a full-blown correction.

GBPUSD reduced the volume of long positions during the price convergence with the 1.2300 resistance level. As a result, there was a pullback of about 100 pips, which eventually turned into a stagnation.

Economic calendar for January 17
Since the opening of the European session, data on the UK labor market have been published, which came out without any fundamental changes. Unemployment in the country remained at 3.6%. Employment increased by 27,000, while jobless claims rose by 19,700.

Expectations coincided with the forecast; there is no reaction in the market.

EUR/USD trading plan for January 17
Presumably, the 1.0800/1.0870 amplitude will focus the market on itself only for a while. As a result, the stagnation will end with an impulse emanating from the stagnation, which will indicate one of the possible scenarios.

The first scenario considers the prolongation of the current upward cycle in the market in case of a stable holding of the price above the value of 1.0880 in a four-hour period.

The second scenario considers the transition from a pullback stage to a full correction if the price holds below 1.0770 in a four-hour period.

GBP/USD trading plan for January 17
Stagnation possibly serves as a process of accumulation of trading forces, which can become a lever for new price jumps. The 1.2150 level serves as a variable support, while the resistance is at 1.2300.

In this situation, cardinal changes will occur only after the price stays outside one or another control level for at least a four-hour period.
 

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Hot forecast for GBP/USD on 19/01/2023

UK inflation fell from 10.7% to 10.5% in December, and the pound gradually increased. Inflation eased for the second month, and it hints at the possibility of a more subdued increase in the Bank of England's interest rate. And these very expectations in regard to the Federal Reserve's actions just recently were the reason why the dollar is getting weaker. Moreover, during the previous meeting, two members of the Board argued for rate cuts. So, everything indicates that not only will the US central bank complete its cycle of interest rate hikes soon, but that the BoE could follow suit. And this means there is no reason for the pound to rise substantially. Investors haven't probably realized this fact yet.

Inflation (UK):

But the main reason why the dollar weakened during the European session was the latest US reports, forecasts for it were also negative. In December, U.S. retail sales softened 1.1% and industrial production fell 0.7%. So some pessimism about the dollar was justified. Especially when it became known that previous data had been revised downward. Retail sales climbed 6.0% and industrial production to 2.2%. And if you look at the final industrial report, things got even worse as the growth rate slowed to 1.6%. But the dollar started to rise after the data was released. It's all about retail sales, which remained unchanged with the revision. And this report is significant because it best reflects the state of consumer activity, which is the engine of economic growth. And the data turned out to be significantly better than expected, which of course will inspire confidence that the United States can avoid a recession.

Retail Sales (United States):

First of all, due to the inflationary dynamics in the UK itself, the pound's growth potential is extremely limited. Investors will have to gradually start changing their positions, not in favor of the British currency. But now it has nowhere to go today either. The total number of unemployment claims in the US may grow by 8,000. Of course, the growth itself isn't very significant, but the forecasts are still negative, so there is no reason for the dollar to rise, at least for today. Hence, the market is likely to consolidate around the current values.

Unemployment claims (United States):

GBPUSD crossed the resistance level of 1.2300. As a consequence, the upward momentum gave the pound the opportunity to come close to the December high. The subsequent swing was expressed in a pullback, indicating a decline in the volume of long positions.

On the four-hour chart, the RSI technical indicator was in the overbought area, above the 70 line. This occurred when GBP crossed 1.2300 and approached the December high. Subsequently, there was a price pullback, which is expressed on the RSI indicator by its return below 70.

On the four-hour and D1 chart, the Alligator's MAs are headed upward, which corresponds to the general bullish sentiment.

Outlook

The pullback stage brought the quote back to 1.2300, which, taking into account the current strengthening, is considered as the least possible price change. For the pullback to pass the stage of correction, the quote should return below 1.2250 on the four-hour chart. In this case, GBP could reach 1.2150.

However, staying above 1.2300 may eventually restart long positions in the pound, and it could update the local high of the upward cycle.

Comprehensive indicator analysis suggests a price pullback for the short-term and intraday trading. While the bullish sentiment is still valid for the medium term.
 

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Hot forecast for EUR/USD on 20/01/2023

The multidirectional nature of the unemployment claims data in the United States was the main reason why the currency market is stagnant. Initial claims for state unemployment benefits dropped 15,000, although it should have increased by 2,000. However, if the data on initial applications turned out to be noticeably better than forecasted, the situation with repeated applications is diametrically opposite. According to forecasts, the so-called continuing claims should have grown by 6,000, but in fact it rose 17,000. Nevertheless, the total number of applications increased by 2,000, i.e. remained virtually unchanged. And as we can see from the forecasts, it was supposed to grow by 8,000. Well, the final data themselves were slightly better than forecasted.

The number of jobless claims (United States):

Today the macroeconomic calendar is completely empty, so it will probably be another stage of a flat market. And this may last till Thursday, when preliminary data on US GDP will be released. In the meantime, not much interesting macro data is expected.

The EURUSD pair has been moving in the sideways range at the peak of the upward cycle all through the trading week. This price move indicates the process of accumulation of trading forces, otherwise the market would have already had a corrective move, which was brewing at the beginning of the week.

On the four-hour chart, the RSI technical indicator is moving along the mid line 50, which corresponds to stagnation. On the D1 chart, the RSI is at 64, which points to the bullish sentiment among traders.

Moving averages on the H4 Alligator are intersected with each other which means sideways trading. On the daily chart, moving averages are directed upward which corresponds to the overall bullish cycle.

Outlook and trading ideas

Based on the structure and the price movement, we can assume that the current flat is ending. A prolonged stagnation may serve as a lever for new speculative price spikes.

The optimal strategy to consider is the method of outgoing momentum, which in the theory of technical analysis can indicate the subsequent direction of the price.

Complex indicator analysis suggests mixed signals for the short-term and intraday trading on the back of the flat market. The overall bullish sentiment is still valid for the medium term.
 

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EUR/USD: Dollar back in disgrace, while euro gains momentum

The euro-dollar pair tested the 9th figure at the start of the new trading week for the first time since April last year. Such price dynamics is due not only to the weakening of the U.S. currency (the U.S. dollar index opened trading with a downward gap), but also to the strengthening of the euro (as evidenced by the main cross-pairs involving euro). Such a fundamental background allows EUR/USD bulls to move towards the upper line of the Bollinger Bands indicator on the D1 timeframe, which currently corresponds to the 1.0950 mark. Overcoming this resistance level will open the way for traders to the 10th figure.

Dollar in disgrace

The U.S. dollar is declining amid an almost empty economic calendar on Monday, following Friday's trading inertia. The U.S. dollar index fell from 102.30 to 101.70 on the last day of last trading week. The weekend didn't change traders' minds: today, the index resumed its downward marathon, heading to the base of the 101st figure. Major currency pairs changed their configuration accordingly, with the exception of USD/JPY, which rose after the publication of the minutes of the Bank of Japan's December meeting (according to some members of the Governing Council, the central bank should "clearly explain that expanding the yield range is not the first step in exiting the ultra-loose policy").

But in general, the greenback is under significant pressure. Recent releases indicate that the Fed is guaranteed to reduce the pace of rate hikes to 25 points, and will do so at its February meeting. On Friday, Fed Governor Christopher Waller (who has long been one of the main hawks in favor of an aggressive rate hike) advocated a 25-point scenario. Earlier, a similar position was voiced by other representatives of the Fed, in particular, Patrick Harker, Lorie Logan, and Esther George.

Such statements were made amid a slowdown in U.S. inflation indicators: note that not only the consumer price index, but also the producer price index came out in the red zone. If this week, core PCE index comes out at least at the predicted level (not to mention the "red color"), the puzzle will be finalized. However, the market already de facto has no doubt that the Fed will reduce the pace of rate hike to 25 points. According to the CME FedWatch Tool, the probability of this scenario at the February meeting is estimated at 99%. I think additional comments are unnecessary here.

Euro outlook

Unlike the dollar, the euro enjoys support from the ECB. Representatives of the central bank are vying to voice hawkish messages, assuring traders that the regulator will not change its hawkish course. Last week, there were rumors in the market that the European Central Bank may reduce the rate hike to 25 points in March. The relevant information was published by Bloomberg, citing its sources in the central bank.

The published insider, to put it mildly, surprised market participants (it was then that the EUR/USD pair updated the local high, dropping to 1.0795) since many ECB members voiced opposite signals in public. Christine Lagarde came to the aid of the euro here: speaking at the Davos economic Forum, she said that the European Central Bank is still far from its target, and the regulator has to take "several significant steps." The hawkish minutes of the ECB's December meeting only complemented her words, keeping the EUR/USD pair within the 8th figure.

Today the "hawkish marathon" got its development. Firstly, ECB Governing Council member and Bank of Finland Governor Olli Rehn said that he sees all grounds for a significant interest rate hike "both in winter and this coming spring." Second, a Reuters poll of leading economists was released today. According to most experts, the European Central Bank will raise rates by 50 points, not only at the February meeting, but also at the March meeting. The polled economists also predicted that the rate will reach 3.25% by the middle of the year (the highest value since end 2008).

Conclusions

The fundamental background formed last week contributes to further growth in the price of EUR/USD. And to date, the situation has not changed: the comments of the head of the central bank of Finland, as well as the published Reuters survey, only added to the fundamental picture, allowing buyers of the pair to test the borders of the 9th figure.

Today's main news flow is expected during the U.S. trading session. Eurozone consumer confidence index will be released (positive dynamics is expected), and ECB representatives Christine Lagarde and Fabio Panetta will give a speech (they can also support the euro). In general, the pair remains bullish. The price echelon has shifted one step up, to the range of 1.0850–1.0950. Probably, in the medium term, EUR/USD buyers will try not only to gain a foothold within the 9th figure, but also to precipitate the 1.0950 resistance level, which corresponds to the upper line of the Bollinger Bands indicator on the daily chart.
 

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EUR/USD. Analysis for January 25. Statistics from the European Union again prevented the euro from falling.

The wave marking on the euro/dollar instrument's 4-hour chart is still quite compelling and getting more intricate, and the entire upward segment of the trend is still quite convoluted. Although its length is better suited for the pulse portion, it has taken on a powerful corrective and extended form. The waves a-b-c-d-e have been combined into a complicated corrective structure, with wave e having a form that is far more complex than the other waves. Since the peak of wave e is substantially higher than the peak of wave C, if the wave markings are accurate, construction on this structure may be nearly finished. I'm still planning for a decline in the instrument because we are predicted to build at least three waves down in this scenario. The demand for the euro currency increased in the first three weeks of 2023, and during this time the instrument only managed to move marginally lower from previously established levels. A new attempt to surpass 1.0721, which according to Fibonacci amounts to 200.0%, was successful, allowing the wave e to take on an even longer form. Unfortunately, there is another delay in starting to build the trend correction part.

The euro is making every effort to maintain its part of the trend.

On Tuesday, the euro/dollar instrument rose by 15 basis points, and the instrument's amplitude was extremely small throughout the day. I think that all of yesterday's movements were just "market noise." Movements of 20–30 points in a variety of directions cannot be interpreted by me as a market response to news or deliberate market activity. It is still true that there is a stagnant increase in demand for US cash. If you pay close attention to the news context, there can be no justification for the market to raise its demand for the dollar. For instance, business activity indices in the US continued to be below the critical value of 50.0. On the other hand, when compared to the data from a month ago, all three indices have increased. In other words, the market could have raised the demand for the dollar but chose not to. If you ignore the fact that two of them stayed below 50.0, the European business activity indices also turned out to be rather strong. But because the statistics were so vague, the market could give them its interpretation. In recent months, it has taken an interest in purchasing euro currency. Another day has passed when, if not an increase, then certainly a decline in demand for the euro.

We can assume that the market paid no attention to this news if we think back to the instrument's overall amplitude. The market seems to be anticipating meetings for the coming week. Before the meetings, perhaps the euro will even be able to increase a little bit further. However, if the increase persists after them, it will be even more challenging to discuss rational movements. Corrective waves, which we frequently saw at the start of the rising trend section, are now completely absent.analytics63d0bd375a595.jpg

Conclusions in general
I conclude that the upward trend section's building is about finished based on the analysis. As a result, given that the MACD is signaling "down," it is now possible to contemplate sales with goals close to the predicted mark of 1.0350, or 261.8% per Fibonacci. The potential for complicating and extending the upward portion of the trend remains quite strong, as does the likelihood of this happening. The market will be ready to finish the wave e when a bid to break through the 1.0950 level fails.

The wave marking of the descending trend segment notably becomes more intricate and lengthens at the higher wave scale. The a-b-c-d-e structure is most likely represented by the five upward waves we observed. After the construction of this portion is complete, work on a downward trend segment can start.

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USD/JPY. Its own atmosphere

The USD/JPY pair has been trading in its own "coordinate system", prioritizing fundamental factors. For example, the pair was actively rising at the start of the week, despite the decline in the U.S. dollar index. Traders of USD/JPY ignored the general weakening of the US currency and even updated the local high (131.14). We will discuss the reasons for such behavior below, but first of all we should pay attention to the most important fact: the bulls failed to settle above the resistance level of 131.00 (middle line of the indicator Bollinger Bands on the D1 chart). Bulls found it hard to climb above this level, which speaks about how unstable their position is. The scale is still in favor of the yen, even in that isolated "coordinate system", in which the pair has to trade.

Yen at the helm
What is the peculiarity of the pair's behavior?

For so many years, the yen acted as a follower, while the greenback took the lead. The Bank of Japan's monetary policy with Governor Haruhiko Kuroda, who was appointed to his post in 2013, repeated the same mantra month after month - that the central bank is committed to accommodative policy and, if necessary, ready to further ease monetary policy parameters. Everybody got used to this rhetoric and did not react to it, at least in the context of the USD/JPY pair. Nearly all of the BOJ meetings were of a pass-through nature, so they had little effect on the price values.

But everything changed in December, when the BOJ allowed long-term Japanese government bond (JGB) yields to move in a wider range at the end of the last meeting in 2022. This decision was made, firstly, quite unexpectedly, and secondly - ahead of Kuroda's resignation (he will leave his post in April). Therefore, the market interpreted the outcome of the December meeting very unambiguously, coming to the conclusion that the central bank had taken the first step towards the normalization of monetary policy. Since then, the yen has ceased to be a "slave" in the USD/JPY pair: the focus is no longer just on the Federal Reserve's monetary policy prospects, but also on the prospects of a pivot in the Japanese central bank's policy.

The BOJ strikes back
The BOJ obviously did not expect such a violent reaction from the market and such unambiguous, categorical conclusions. That is why Kuroda said back in late December that the central bank was not going to abandon its ultra-loose monetary policy in the near future. But the market ignored his rhetoric.

Earlier this week, the bears had to deal with another blow: the BOJ published the minutes of its December meeting where several Governing Council members stressed that the "the Bank should carefully explain that it needs to continue with monetary easing, that its accommodative policy stance has not been changed,". The bears were then forced to retreat. Bulls took the initiative and hit a new local high on Tuesday, testing the 131.00 level of resistance. But they failed to hold on to their positions: the bears took the initiative as soon as the bullish momentum faded. At the moment, when this article was being written, the pair was already going down to the bottom of the 129th figure, almost 200 points away from the local high (in only 2 days!).

The pair is going down not only because the dollar is "moping" (dollar index is moving to the base of the 101st figure again), but the yen is also strengthening its positions due to "its" own fundamental factors.

Inflation, inflation, inflation
First, inflation in Japan continues to show an uptrend, renewing multi-year records. Overall consumer price inflation accelerated to 4.0% in December. Excluding fresh food and energy, consumer prices climbed 3.0% annually, and the corporate goods price index was up 10.2% y/y. On Friday, January 27, Japan will publish another important inflation indicator, the January Tokyo Consumer Price Index. It is considered a leading indicator for price movements across the country, so certain conclusions can be drawn from the published figures. If it will be in favor of the yen again, the USD/JPY pair may return to the area of 127-128 figures, where it was traded in early January.

Traders of the pair are now acting ahead of the consolidated forecasts. Thus, according to most experts, Tokyo's overall CPI will rise to 4.2%: the last time the figure was at that high was in November 1981. The other components of the report (excluding fresh food prices; excluding food and energy prices) should also show an uptrend.

Conclusions
Judging by the results of the last few days, we can conclude that the yen held its ground and did not let the bulls settle above the resistance level of 131.00. Undoubtedly, the greenback, which is getting weaker all over the market again, has also played its part. But we should also consider that the pair was rising this week while the USD index was falling. Therefore, the pair is bearish also due to the strengthening of the Japanese currency. Further price declines will largely depend on this week's key releases: if US GDP growth data for Q4 and the core PCE index come out in the red, while Tokyo CPI surprises with its greenback, the pressure on the pair will only intensify. The main bearish target is 127.30 (bottom line of the Bollinger Bands indicator on the D1 chart).

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Hot forecast for GBP/USD on 27/01/2023

US economic growth is expected to have slowed from 1.9% to 1.6%, but the first estimate of GDP for the fourth quarter showed a slowdown to 1.0%. This is perfectly in line with speculation that the US economy is at risk of sliding into recession. And with it the global economy. In theory, this would lead to the inevitable depreciation of the dollar. However, this has not happened. If you look at the pound, it has actually remained in place. The dollar edged up when the report was published, but then it quickly returned to the positions at which it was just before the US GDP report was released. The reason for such a strange reaction to obviously weak data lies in the preliminary estimates themselves. Yes, in annual terms, the growth rate slowed down significantly. However, if we look at the quarterly data, the economy grew by 2.9% in the fourth quarter, while the growth forecast was 2.7%. And if you also look at the durable goods orders, which suddenly rose as much as 5.6%, well above the 2.2% forecast, then you would see that the market's reaction is quite understandable. Yes, the economy has slowed down a lot, but there are signs that a recession can be avoided. The durable goods report hints at the possibility of an economic recovery as early as the first quarter.

GDP change (United States):

Despite the obvious interest in long positions, GBPUSD failed to update the local high of the upward cycle. As a result, 1.2440 has become a kind of resistance level against which stagnation/rebound occurs.

On the four-hour chart, the RSI technical indicator is moving in the upper area of 50/70, which points to the bullish sentiment. There is a similar technical signal on the daily chart.

On the four-hour chart, the Alligator's MAs have numerous intersections, which corresponds to the flat movement. The MAs are headed upwards.

Outlook

Based on the fact that the price has been fluctuating this week, the pair has been trading within the sideways channel of 1.2300/1.2440. At the peak of the upward cycle, this movement points to an accumulation process. As a result, an outgoing momentum should emerge that may indicate the price's succeeding direction.

In terms of the complex indicator analysis, we see that in the short-term and intraday periods, the indicator is providing a mixed signal because of stagnation. In the mid-term period, the indicators are moving in the direction of the upward cycle from the previous fall.

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EUR/USD and GBP/USD trading plan for beginners on January 30, 2023

Details of the economic calendar on January 27
The economic calendar was almost empty on Friday. No important reports were published in the EU, the United Kingdom, and the Unites States.

However, it was possible to highlight the U.S. Pending Home Sales Index, which grew by 2.5% in December. Despite the positive data, no one paid attention to them.

Analysis of trading charts from January 27
The EURUSD currency pair has been within the sideways movement of 1.0840/1.0930 throughout the past week. This amplitude indicates the process of accumulation of trading forces, where, in the light of upcoming economic events, it will be won back in the form of price leverage.

Despite the fact that the GBPUSD currency pair had a wider amplitude compared to EURUSD, in general terms, everything is the same. The borders of price fluctuations are clamped between the values of 1.2300 and 1.2440, where the quote has been moving for almost two weeks. In fact, this price movement, as well as for the euro, indicates the process of accumulation of trading forces. Otherwise, a full-blown correction would have already occurred in the market.

Economic calendar for January 30
The economic calendar is traditionally empty on Monday. No important reports are expected. But do not be discouraged as the heat will begin at the middle of the week: the results of the Fed meeting, followed by the ECB, the Bank of England, inflation in the EU, and U.S. Department of Labor report. We expect high volatility in the financial markets.

EUR/USD trading plan for January 30
In this situation, where there is a price movement looped in a sideways range, it is appropriate to work according to the method of breaking through one or another stagnation border. As a result, with a high degree of probability, an outgoing impulse will arise, which will lead to the completion of the flat, indicating the subsequent movement.

Based on the above, consider two possible scenarios:

The upward move will be relevant if the price holds above 1.0940 in a four-hour period. This move will lead towards the 1.1000 psychological level.

The downward move will be applied if the price holds below 1.0840 in a four-hour period. This move could initially push the euro towards 1.0800. After that, a transition to the full-blown correction stage is possible.

GBP/USD trading plan for January 30
Based on the fact that the flat still takes place in the market, the tactics of working by the method of breaking through one or another range boundary is considered the most optimal.

Let's concretize the above:

The downward move will be relevant if the price holds below the level of 1.2300 in a four-hour period. This step can lead to the formation of a full-blown correction.

The upward move is taken into account in case of a stable holding of the price above the value of 1.2450 in a four-hour period. This move will indicate a continuation of the upward trend.

What's on the charts
The candlestick chart type is white and black graphic rectangles with lines above and below. With a detailed analysis of each individual candle, you can see its characteristics relative to a particular time frame: opening price, closing price, intraday high and low.

Horizontal levels are price coordinates, relative to which a price may stop or reverse its trajectory. In the market, these levels are called support and resistance.

Circles and rectangles are highlighted examples where the price reversed in history. This color highlighting indicates horizontal lines that may put pressure on the asset's price in the future.

The up/down arrows are landmarks of the possible price direction in the future.
 

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AUD/USD. A black streak for the Australian dollar

A "black streak" came for the AUD/USD bulls after a streak of gains. The pair was rising almost the entire week and hit 0.7147, a seven-month high. But traders couldn't keep it at the level of the 71st figure: the price went down for the second day and tested the 69th price level. Although, it is worth taking note of the fact that the pair is losing ground not only because of the greenback's strength ahead of the Federal Reserve meeting.

Australia: Labor market and inflation
In exactly one week's time, the Reserve Bank of Australia will hold its meeting on February 7. Therefore, traders are not only discussing the outcome of the Fed meeting, but are also preparing for the announcement of the RBA's verdict.

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AUD/USD. A black streak for the Australian dollar
Take note that last week, the pair received strong support from Australian inflation. Data on consumer price index growth in Australia turned out to be in the green zone, surprising market participants. For example, the monthly CPI indicator rose to 8.4% in the twelve months to December (with a forecasted increase to 7.6%). As for Q4 as a whole, all indicators were also in the green zone, exceeding analysts' expectations. In particular, Australia's annual rate of inflation has risen to a record high of 7.8% (with the forecast of 7.5%). The indicator continued the uptrend that it demonstrated throughout last year. The CPI rose 1.9% in the December 2022 quarter, while most experts had forecast a decline to 1.6% (after 1.8% in the third quarter). Core inflation in Australia (weighted average CPI) in quarterly terms also exceeded forecasts, coming in at 1.7%.

The inflation report "revived" the aussie after the previous labor market report. This report, on the contrary, turned out to be very controversial. The growth rate of the number of employed people fell to -14,600, while the growth rate was forecasted to +27,000. After the report, there were rumors in the market that the RBA might take a break in hiking rates in the beginning of spring. Unexpectedly strong inflation refuted these rumors, and the pair managed to conquer the resistance level of 0.7000.

The decline was due to investors' concerns over the actions of the Australian central bank. In my opinion, these fears are exaggerated.

The next steps of the RBA
Let me remind you that after the previous (December) meeting, RBA Governor Philip Lowe said that the central bank does not follow the pre-planned course: according to him, "the size and timing of future rate hikes will continue to be determined by incoming data and the Board's assessment of the outlook for inflation and the labor market". And while the labor market has generally "let down" the bulls, rising Australian inflation clearly speaks in favor of further rate hikes.

In this context, another phrase from Lowe is also noteworthy - that "the Board's priority is to return inflation to target over time".

One would assume that the central bank would slow the pace of rate hikes. But in this case, the RBA played ahead of the curve, lowering the rate to 25 points ahead of many of the leading central banks in the world. That's why this issue was off the table months ago.

As for rumors that the RBA may pause in monetary tightening, first of all, representatives of the central bank have repeatedly denied such intentions, and secondly, inflation indicators have offset the "dovish" talk, even amid weak "Australian Nonfarm".

Conclusions
The Australian dollar, in my opinion, unreasonably yields to pressure from the US currency. Certainly, ahead of the announcement of the results of the Federal Reserve's February meeting, it is detrimental and even dangerous to open any trading positions on the pair. But if the Fed does not ally with the greenback, the upward route for the pair's bulls will be open, even despite some doubts regarding the RBA's further actions. The bullish target will be 0.7150 again.

Technically speaking, the pair is between the middle and the upper lines of the Bollinger Bands indicator on the D1 chart, as well as above all lines of the Ichimoku indicator, which demonstrates a bullish "Parade of Lines" signal. In other words, technically, the pair retains the potential for further growth, to the major resistance level of 0.7150 (the upper line of the Bollinger Bands indicator on D1). A breakdown of this level will open the way to the area of the 72nd figure.

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Aggressive Fed rate hike is ending

Euro rose above 1.1000 after the Fed signaled a change in their stance on monetary policy. Their statements during yesterday's meeting were more dovish compared to December, with interest rates increasing by only 25 basis points to a range of 4.5%-4.75%.

At first, markets did not react much to the news as everyone was waiting for the speech of Jerome Powell. But when the Fed Chairman confirmed that they will no longer be aggressive in terms of interest rates, risk appetite surged. The decision was kind of in line with what everyone was expecting, that is, a more optimistic view of inflation and the economy. Of course, Powell was not objectively dovish, but neither was he overly hawkish, which was enough for the market.

Speaking to reporters on Wednesday, Powell said they are forecasting "a couple more" rate hikes, but are ready to adjust their plans if price pressures eased faster than expected. When asked about easing conditions in financial markets that could complicate the central bank's path to return to its 2.0% inflation target, he did not sound particularly concerned.

The 25 basis point hike that was made yesterday was another step towards policy normalization after a half-point rate hike in December and four giant hikes of 75 basis points before that. Most likely, the soft inflation data in recent months has been persuasive enough for the Fed to consider suspending their rate hike campaign. Although the committee continues to cite high prices, the hint of two more 25 basis point hikes confirms market expectations of a final rate hike of 5.25%.

During the press conference, Powell admitted that the US economy is now in an era of disinflation with cooling price pressures. He stressed that more data is needed before they can declare victory, but did not specify how much they need to ensure that inflation is on the right track.

In terms of the forex market, demand for euro surged, but buyers need to protect 1.1000 in order to maintain the chance of rising above 1.1050. Possible price levels in such a situation are 1.1090 and 1.1125. In the event of a decline, EUR/USD could move below 1.1000 and head towards 1.0960 and 1.0920.

For GBP/USD, the sideways trend persists, so buyers need to return above 1.2420 to regain their advantage. Only the breakdown of this resistance level will strengthen the hope of a rise towards 1.2470, after which it will be possible for the pair to reach 1.2540. If pressure returns and sellers take control of 1.2350, the pair will fall to 1.2290 and 1.2230.

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EUR/USD. The Fed hit the dollar, the ECB hit the euro

The European Central Bank increased the interest rate by 50 points at this year's first meeting, while announcing a 50-point hike at the next meeting in March. Despite such hawkish results of the February meeting, the euro came under pressure. The single currency retreated from a multi-month price peak (1.1034) and returned to the area of the 9th figure. Anomalous, at the first glance, market reaction is due to several factors.

Spring is near
If you assess the February meetings of the Federal Reserve, Bank of England and ECB, you can take note of one general characteristic. On the one hand, central banks declared the continuation of a hawkish course, but on the other hand, they made it clear that aggressive monetary policies are coming to an end. That's why the dollar was under attack at the end of the Fed meeting, the pound was under pressure by the end of the BoE meeting, and the euro was losing ground by the results of the ECB meeting. At the same time, traders actually ignored the fact that the central banks announced further steps to monetary tightening.

For example, ECB President Christine Lagarde without any vague wording, which is considered "straightforward", announced that the ECB intends to raise interest rates by another 50 basis points during the next meeting in March. According to her, the disinflationary process hadn't begun, despite the slowdown in the overall consumer price index (core inflation continues to show an uptrend).

It would seem that such straightforward hawkish verbal signals should have served as a springboard for the euro. But instead of growth to the resistance level of 1.1090 (the upper line of the Bollinger Bands indicator on the weekly chart), the price turned 180 degrees and was marked in the area of the 8th figure, followed by the retreat to the area of the 9th price level.

Why did this happen?
First of all, Lagarde, while announcing monetary tightening in March, questioned the further growth of interest rates. According to her, after the March decision "the ECB will evaluate the subsequent path of monetary policy." At the same time, market expectations (in particular, currency strategists at Danske Bank and a number of other large conglomerates) are more hawkish. The assumed scenario includes a 50-point hike in March and a 25-point increase at the next meeting (by 50 points according to some other analysts). Therefore, Lagarde's "wrap-up" sentiment was negatively received by EUR/USD bulls. The single currency was under pressure as traders took the ECB's message as a sign that the central bank nears the end of its rate hike cycle. In my opinion, the market adequately assessed the situation and correctly perceived the signals of the ECB.

Secondly, the ECB head emphasized her stance on problematic aspects - in particular, she said that economic activity in the European region has slowed down noticeably. At the same time, "high inflation and tighter financing conditions, these headwinds dampen spending and production,". Such comments put pressure on the euro.

Nevertheless, despite the euro's negative response, the EUR/USD pair did not collapse into the area of 7-6 figures, but only retreated from the multi-month price high to the base of the 9th price level. The underlying reason for such stress tolerance is that Lagarde tried to maintain a balance in her rhetoric. On the one hand, she announced a "guaranteed" 50-point hike in March, on the other hand, she questioned further steps towards tightening. On the one hand, Lagarde complained about the slowdown in economic activity; but then she also admitted that the European economy has been more resilient than expected. Moreover, according to forecasts, the economy will show signs of recovery in the coming quarters. At the same time, the ECB head pointed to the optimism of entrepreneurs (obviously referring to the PMI and ifo indices), stable gas supplies to Europe and reduced interruptions.

Conclusions
Figuratively speaking, the scales are back in equilibrium again: The Fed put pressure on the dollar, and the ECB put almost as much pressure on the greenback. The bulls couldn't conquer the 10th figure, the bears couldn't pull the price down to the 7th figure (and even failed to get a foothold at the 8th price level). Now everything will depend on the values of the key macroeconomic indicators, first of all, in regards to inflation. If core inflation in the European region persistently climbs up, the ECB may raise the rate not only in March but also at the next meeting. The US faces a similar situation: the Fed chief has declared a hawkish course, "tying" the scope of monetary tightening to the dynamics of key inflation indicators. Each inflation report and each inflation component (both in the US and Europe) will be viewed through the prism of further central bank actions.

Following the Fed and ECB meetings, the pair remained in the 1.0850-1.0970 range within which it has been trading for several weeks. In my opinion, in the mid-term perspective, the pair will fluctuate in the given price range, alternately pushing back from its limits, reacting to the current information flow.

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