Investors expect a technical breakout of well-defined levels

  • EUR / USD entered a phase of consolidation around 1.1300.
  • The ECB’s Knot sees the possibility that the bond buying program will end sooner than expected.
  • Investors are expected to sit on the sidelines while they wait for volumes to return to normal levels.

For the second day in a row on Thursday, EUR / USD climbed above 1.1350 but failed to maintain its bullish momentum. The pair appears to have entered a phase of consolidation around 1.1300 on Friday and market participants will consider a breakout of well-defined technical levels when market action normalizes after the New Years holiday.

On Thursday, European Central Bank Governing Council member Klaas Knot noted that the ECB could end its bond-buying program earlier than expected if inflation continues to surprise on the upside. Knot further argued that it was appropriate for the ECB to prepare for a gradual normalization of monetary policy. Although these remarks helped the common currency find some demand, the resilience of the dollar limited the rise of the EUR / USD.

As the yield on 10-year US Treasury bonds holds above 1.5% as the new year approaches, the US dollar index, which tracks the performance of the greenback against the to a basket of six major currencies, remains afloat above 96.00.

US bond markets will close early on New Year’s Eve and market action is expected to remain subdued for the remainder of the day.

EUR / USD technical analysis

The Relative Strength Index (RSI) indicator on the four-hour chart retreated to 50, confirming the view that buyers are showing no interest in the common currency after the rejection at 1.1360. On the upside, 1.1340 (static level) lines up as intermediate resistance before 1.1360 (static level, post-BCE high) and 1.1400 (psychological level).

The 100 and 200 period SMAs on the same chart appear to have formed a zone of strong support at 1.1290 / 1.1300. In the event that a four hour candle closes below this level, further losses towards 1.1270 (static level) could be observed.

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