Euro coils in a triangle ahead of next week's central bank meetings

Euro vs US Dollar traces out a triangle amidst uncertainty as to the outlook for interest rates.
Eurozone GDP comes out slightly below expectations and has limited impact on EUR/USD.
German HICP data could provide an early indication of what the ECB will do at next week’s meeting.
The trend remains bullish with the 200-day SMA at circa 1.1190 as the next target.

The Euro (EUR) continues trading in a familiar range around the 1.1000 handle against the US Dollar (USD), after the release of Eurozone GDP data, on Friday. First quarter growth in the region came in at 1.3% compared to the previous year, and 0.1% compared to the previous quarter. The figures were slightly below expectations of 1.4% and 0.2% respectively.

The pair coils in a triangle as traders wait for important meetings held by the US Federal Reserve (Fed) and the European Central Bank (ECB) next week, at which rate-setters will decide the future path of interest rates. So far data has not helped clarify whether the ECB will hike rates by 25 or a bigger 50 bps tranche. Higher interest rates are positive for currencies since they increase demand from global investors looking for somewhere to park their money; the rate differential between the US and Eurozone is, therefore, a key determinant of the exchange rate.

Other key factors influencing markets are lingering banking crisis fears and Eurozone HICP inflation data for Germany, out at 12:00 GMT on Friday. From a technical standpoint, the overall trend is up and the probabilities favor long holders.

EUR/USD market movers

The US Dollar benefits from support after the release of US macroeconomic data on Thursday that saw sticky inflation despite a slowdown in growth.
Fed Funds Futures – a market-based gauge of future interest rates – increased the chances of the Fed hiking its base rate by 0.25% at the May 3 meeting from around 70% to 80%. It also raised the chances of a June hike to above 25%.
Uncertainty remains as to whether the ECB will hike rates by 0.25% or 0.50% at its May 4 meeting. If the latter, the Euro will probably surge.
ECB’s chief economist Philip Lane has said the size of the hike will depend on both the state of Eurozone banks, as assessed by the ECB’s Bank Lending Survey out on May 2, as well as April flash HICP inflation data released on the same day. (German HICP is out on Friday)
The revelation that troubled US regional lender, First Republic Bank – which benefited from a $30B handout from sector peers during the March crisis – is once again in trouble seems to have set off alarm bells that the bank could fail. US government officials from the FDIC, Treasury and Fed are in talks with industry leaders in an attempt to put together another rescue plan.
US recession fears won’t go away and may be deep rooted, as reflected by comments from JP Morgan’s CIO, Bob Michele, who sees deposit flight in the US as more systematically linked to lower-income earners burning through savings to meet the rising cost of living, according to an interview with Bloomberg News.
A key data release for the Euro on Friday is Eurozone first quarter GDP at 9:00 GMT, which is expected to show a 0.2% rise QoQ and 1.4% rise YoY.
German Harmonized Index of Consumer Prices (HICP) for April out at 12:00 GMT could also be key as it will provide a glimpse of inflation in April for the whole region, released on May 2.
A meeting of the Eurogroup of Eurozone finance ministers currently underway may also provide commentary that impacts markets.
The main releases for the US Dollar are University of Michigan (UoM) Consumer Confidence for April, out at 14:00 GMT, also including UoM 5-year Inflation Expectations, and, US Personal Consumption Expenditure Price Index for March at 12:30 GMT, the Federal Reserve’s preferred gauge of inflation.
Personal Spending and Personal Income for March are both also out at 12:30 GMT.

EUR/USD technical analysis: Triangle almost complete

EUR/USD continues trading sideways around the 1.1000 handle as a probable triangle pattern unfolds. Panning out and the broader medium-term uptrend remains intact – and will continue to – as long as the 1.0830 lows hold. Overall the odds favor a continuation of the dominant Euro bullish trend.

On the 4-hour chart, EUR/USD looks like it is near to completing a triangle pattern. Since triangles are usually composed of five waves it is probably almost finished, with the final wave E currently reaching the lower boundary line of the triangle.

Triangles can breakout in either direction but, given the dominant trend is bullish, the odds partially favor an upside breakout. As such, a decisive break above the 1.1095 year-to-date highs would confirm such a bullish breakout, and a continuation of the Euro’s uptrend to the next key resistance level at around 1.1190, where the 200-week Simple Moving Average (SMA) is located. If the triangle fulfills its full price potential (based the height of the triangle at its widest point extrapolated higher) the Euro-US Dollar could even reach 1.1229.

For the sake of clarity, a ‘decisive break’ could be defined as either a ‘breakout candle’ – a long green bullish daily candle that extends above the 1.1075 highs and closes near its high – or three smaller green bullish candles in a row that break above the highs.

Alternatively, a break and daily close below the key 1.0909 lows would signify a bearish breakout from the triangle, with a target at 1.0805, which in itself could suggest a possible reversal of the dominant trend.

Finally, the Relative Strength Indicator (RSI) in the lower pane, is a mirror image of price, tracing out a little triangle of its own, and so giving no clues as to the underlying strength of the market or in which direction the eventual break will be.