EUR/USD Forecast: ECB meeting and US government shutdown to lead the way

Special update: US Government officially shut down 

Trading was choppy this past week, particularly around the EUR/USD pair, but dollar's prevalent weakness once again dominated the FX board. EUR gains were modest ahead of the upcoming ECB's monetary policy meeting, with officers working to keep gains at check, fearing an expensive currency will slow down inflation progress. Further weighing on the common currency was inflation as in the EU, the YoY CPI was confirmed at 1.4% in December, down from 1.5% in November. In the US, the now familiar political woes, centered on a possible government shutdown, weighed. As for central bank officers, most pledged for three rate hikes this year, but their hawkish words are no longer heard by the market, which prefers waiting for Powell.  In the meantime, Wall Street soared to record highs, while US Treasury yields surged to their highest since September 2014.

The ECB is clearly optimistic on the economic recovery, and inside pressures to remove QE for good have increased but seems unlikely Mario Draghi will  give his arm to turn. In fact, it should not surprise markets if he tries once again to down talk the common currency. No changes to the economic policy or the forward guidance are expected this time.

Technically, the EUR/USD pair has set a higher high and a higher low weekly basis, reaching its highest since December 2014 and closing it marginally higher, all of which maintains the bullish trend in place. The pair is up for a fifth consecutive week, with the chart showing that technical indicators have pared gains near overbought readings, but aren't suggesting upward exhaustion. In the daily chart, the bullish potential is even stronger, as the 20 SMA has gained  a strong upward slope below the current level, while the Momentum resumed its advance after correcting overbought conditions, as the RSI consolidates around 66, all of which leans the scale towards the upside.

However, the pair would now need to surpass the mentioned 1.2320 region to attract more buying interest and be able to extend its gains towards 1.2460, a major long-term static resistance level. The immediate support is 1.2200, but the low for the week at 1.2164 is a more relevant one, with a break below it favoring a steeper correction toward the 1.2000 figure.

Market's sentiment is quite mixed, as the greenback is seen up against European currencies, but weakening against safe-haven and commodity-related ones. In the particular case of the EUR/USD pair and according to the FXStreet Forecast Poll, bears have taken the lead in the weekly perspective, now accounting for a 45%, and targeting on overage 1.2226. Last week, bulls were the majority, but the average target back then was 1.2162, meaning that the increased negative sentiment could be more a result of caution ahead of the ECB's meeting than hopes of a dollar's recovery. In the longer-term view, the picture is quite the same, with an increment in the number of bears, but higher targets ahead.

The FXStreet overview chart shows that, despite averages, sentiment is quite bullish, weekly and monthly basis, although the longer-term outlook is neutral, with the pair seen mostly hovering around 1.2000.