Forex Analysis & Reviews: 07.02.2023 - Commerzbank analysts and ECB...

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07.02.2023 05:41 PM

Commerzbank analysts and ECB officials do not expect a strong fall in the euro.

It's time to discuss the likelihood of a decrease now that the EUR/USD and GBP/USD pairs have been declining since last week. I'll make an effort to comprehend the issue of how far the euro can fall today. We have the following initial data: A further 75 basis points will be added, bringing the ECB rate to 3.75%. The Fed's rate will increase by at least an additional 50 basis points, reaching 5.25%. The adjustments that are anticipated for future meetings initially appear to be very similar. This leads us to the conclusion that neither the price of the euro nor the price of the dollar will be able to rise greatly in the near future. But let's look a little further.

Inflation is the first thing to consider. Inflation in the European Union is still very high and has only been dropping for three months. Core inflation, meanwhile, has not yet reduced at all. Francois Villeroy de Galhau, an official of the ECB, discussed this yesterday. He stated that the inflation rate is not far from its high and made a new monetary policy tightening implication. He added that it is rare for the ECB to have to decide between battling inflation and avoiding a recession. Let's solve the problem. Naturally, the phrase "inflation" refers to the base index, which is currently 5.2%. The ECB does not anticipate this indicator to increase much, but it is also not expected to decrease either. Core inflation is inflation that excludes the cost of food and energy. As we can see, the main rate of inflation is falling exactly because energy prices are reducing. The ECB must keep raising the rate since the base indicator is still rising. Furthermore, growth may exceed 75 basis points. The euro currency will be supported in the upcoming months by this.

At the same time, Commerzbank analysts stated that they do not anticipate a significant decline in the value of the euro. They anticipate Powell's address at the Economic Club of Washington today to be filled with "hawkish" language, "which may marginally enhance the demand for the dollar." The Fed's interest rate is essentially unchanged. But as we learned above, the ECB rate is likewise constant. The results show that while the Fed rate is essentially unchanged in 2023, the ECB rate has the potential to increase by more than 75 points. This implies that the value of the euro should not decline too much. Since the market has been doing nothing but increasing purchases over the past few months, the correction section of the trend, which I have been talking about nonstop lately, also needs to be developed. It is unable to continuously perform it in non-stop mode. Everything points to numerous waves of correction (perhaps fairly shallow) at first, followed by a new upward section of the trend. The euro still has every reason to fall another 200-300 basis points if the correction is small.

I draw the conclusion that the upward trend section's development is finished based on the analysis. As a result, sales with targets close to the Fibonacci level of 1.0350 (261.8%) can now be taken into consideration. There is still a chance that the upward section of the trend will become much more complicated. However, nearly for the first time in recent weeks, a picture that can be regarded as the start of the first downward wave as a part of a new trend segment is visible on the chart.

The development of a downward trend section is implied by the wave structure of the pound/dollar pair. Currently, it is possible to think of sales with targets near the level of 1.1508, which corresponds to 50.0% of the Fibonacci. You can set a stop loss order above the peaks of waves e and b. Everything now depends on the decisions made by the Fed and the Bank of England in March, as well as on economic indicators, particularly those related to inflation. Wave c may take on a less protracted form.

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*Disclaimer: The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.