EUR/USD and a Slide to Sub-$1.0750 in the Hands of Fed Chair Powell

It is a busy day ahead for the EUR/USD. Manufacturing PMI numbers for Italy and Spain and finalized PMIs for France, Germany, and the Eurozone will be in focus early in the session. Barring revisions to the PMIs for France and Germany, Italy and the Eurozone’s PMIs will draw the most interest.

However, later in the session, prelim January inflation numbers for the Eurozone will be the key stats of the day. Following member state numbers this week, a pickup in inflationary pressure would support a hawkish ECB policy move and forward guidance tomorrow.

Economists forecast the annual inflation rate to soften from 9.2% to 9.0% while expecting the core inflation rate to pick up from 5.2% to 5.4%.

Investors also need to consider ECB member speeches. However, no members are due to speak today, leaving chatter with the media to influence.

EUR/USD Price Action

At the time of writing, the EUR was up 0.01% to $1.08615. A range-bound start to the day saw the EUR/USD fall to an early low of $1.08593 before rising to a high of $1.08655.

Technical Indicators

The EUR/USD needs to avoid a fall through the $1.0846 pivot to target the First Major Resistance Level (R1) at $1.0890 and $1.09. A return to $1.09 would signal a bullish session. However, the EUR/USD would need hotter-than-expected inflation numbers to support a pre-Fed breakout.

In the case of an extended rally, the bulls will likely test the Second Major Resistance Level (R2) at $1.0919 and resistance at $1.0950. The Third Major Resistance Level (R3) sits at $1.0992.

A fall through the pivot would bring the First Major Support Level (S1) at $1.0817 into play. However, barring a Fed-fueled sell-off, the EUR/USD pair should avoid sub-$1.0750. The Second Major Support Level (S2) at $1.0773 should limit the downside.

The third Major Support Level (S3) sits at $1.0700.

Looking at the EMAs and the 4-hourly chart, the EMAs send a bullish signal. The EUR/USD sits above the 50-day EMA ($1.08579). The 50-day EMA pulled away from the 100-day EMA, with the 100-day EMA widening from the 200-day EMA, delivering bullish signals.

A hold above the 50-day EMA ($1.08579) would support a breakout from R1 ($1.0890) to target R2 ($1.0919) and $1.0950. However, a fall through the 50-day EMA ($1.08579) would give the bears a run at the 100-day EMA ($1.08179) and S1 ($1.0817). A fall through the 50-day EMA would send a bearish signal.

The US Session

It is a busy day on the US economic calendar. ADP nonfarm employment change will draw plenty of interest ahead of ISM Manufacturing PMI and JOLTs job opening numbers. We expect the labor market numbers to have the most influence ahead of the all-important Fed interest rate decision and Fed Chair Powell press conference.

A 25-basis point Fed rate hike would leave Fed Chair Powell to decide the fate of the dollar and market risk sentiment. A hawkish policy outlook, citing elevated inflation, tight labor market conditions, and a resilient US economy, could spook the markets.