Central Bank Activity Heats Up, Drives Volatility In FX Market

ECB Keeps Rates Unchanged, Focus Shifts on The Fed

Bogdan Giulvezan

Last week the European Central Bank kept the interest rate unchanged, as expected. The monetary policy didn’t suffer any changes, and ECB President Lagarde did little to move the Euro during the virtual press conference but despite this relative lack of catalysts, the EUR/USD bounced at support and completed a bullish week.

The markets are shifting to risk-on mode due to hopes that the newly minted Biden administration will push a stimulus program through Congress and that the rollout of the coronavirus vaccine will boost economic growth. This could potentially mean that we will see money bleed out of the safe-haven US Dollar and into riskier assets or other currencies. Such a scenario would be bullish for EUR/USD but a lot will depend on the data released throughout the week.

Key Events for the Week Ahead

Tuesday, January 26 at 3:00 pm GMT, The Conference Board Inc. will release the Consumer Confidence, which is a survey that gauges the overall economic situation and is derived from the opinions of about 3,000 U.S. households. The report acts as a leading indicator of consumer spending and usually has a medium impact; however, the expected figure is 88.9, a small change from the previous 88.6.

Wednesday, January 27 at 7:00 pm GMT, the FOMC will release their Monetary Policy Statement, which contains the Federal Funds Rate decision as well as the economic reasons that determined it. The rate is not expected to change but the press conference that follows may offer clues about future policy changes, thus triggering volatility.

The last major release of the week will be the U.S. Advance GDP, scheduled for Thursday, January 28 at 1:30 pm GMT. The expected quarterly change is 4.2%, while the previous was 33.4%, and considering that the Advance version is the earliest, it tends to have the highest impact.

Chart Analysis – EUR/USD

The pair is currently trading at 1.2160, in close vicinity of 1.2175 resistance, after a perfect bounce that happened right on 1.2060 support. Price moved above the bearish trend line and is sitting just above the 100 periods Exponential Moving Average (4-hour chart) but we can see that the last few candles show long wicks and small bodies, which is a sign of market indecision.

Adding to the signs of indecision is the 100 EMA, which is now moving flat, and the position of the MACD lines, which are coming together, indicating a drop in momentum. The RSI is neutral, thus it is not of much help.

If movement picks up and the bulls manage to close a daily candle above 1.2175 resistance, we will likely see a touch of 1.2220 or even a break, depending on the data scheduled for release this week. On the other hand, a bounce lower from the current level will make 1.2060 the new target.