• EUR/USD correcting Friday's drop but bearish while below the 50-hour EMA.
  • Eyes on 1.15 the figure while markets access the divergence between the ECB and Fed.

EUR/USD will start the week after a poor end to last following the market's risk-off reaction to key, yet disappointing, US data. EUR/USD ended the day down some 0.35% falling from a high of 1.1482 and breaking the figure to print a low of 1.1398. The pair recovered some ground to end at 1.1415 and remains in technically bullish territory for the week ahead

US Retail Sales fell a steep 1.9% MoM, with control group sales down 3.1% MoM. ''The data suggest that the highest inflation in 40 years is impacting consumer behaviour, and this may well extend into the first quarter when the end of the child tax credits will also weigh,'' analysts at ANZ Bank explained.

In other data, Manufacturing also disappointed, dropping 0.3% MoM with Industrial Production slipping 0.1% MoM. ''The weakness in manufacturing was driven by a 1.3% drop in auto vehicles and parts,'' the analysts at ANZ Bank noted. 

Additionally, January preliminary University of Michigan Consumer Sentiment dropped to 68.8 vs 70.6. Of note, current conditions are now at their lowest level in a decade and future conditions are down as well. Inflation expectations edged higher again and this aligns with sentiment surrounding the Federal Reserve. 

The market is pricing for an aggressive Fed in this regard, although the Fed's chairman, Jerome Powell while telling the Senate Banking Committee last week that he is keen to fight inflation, he also implied a very measured course of action. Additionally, Philly Fed President Patrick Harker said last week that he sees the Fed starting to shrink its balance sheet “in late 2022 or early 2023” after the central bank has raised its target rate sufficiently, to around 1 per cent from near zero. 

Nevertheless, the divergence between the Fed and the Europen Central Bank is underpinning the greenback. ECB officials are not supporting the notion of a 2022 lift-off. Conversely, the Fed's funds target is expected to rise as early as March and could increase by 1% between now and the end of this year.

EUR/USD drivers for the week

Given the recent slide and corrective behaviour in the US dollar on Friday, the week ahead will offer an interesting technical scenario for EUR/USD on the approach to 1.15 the figure. In the absence of Fed speakers, the key fundamental drivers will be geopolitical tension in Russia and political noise in Italy polished off by the ECB minutes from the December meeting with a focus on the Omicron situation in Europe.

EUR/USD technical analysis

The bears could still emerge to test a touch deeper, potentially all the way to the prior resistance as illustrated in the daily chart above.

From an hourly perspective, following a break below the 50-hour EMA, the price could be stalling in its correction. However, while a 38.2% Fibo has already been hit, there is room still to go to mitigate the imbalance of price to 1.1424 in a 50% mean reversion of the hourly impulse: 

1.1395 could be targetted on the next bearish hourly impulse.

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