EUR/USD 5-Minute Analysis

The EUR/USD currency pair experienced extreme volatility on Monday. Early in the morning, the euro began to rise. However, the surge in the euro was not driven by the services PMI indices for Germany and the Eurozone, released around the same time, as these indices are not highly significant and were published as second estimates, which are typically less impactful than first estimates. The report that could genuinely explain the euro's growth was the German inflation data, but this was published much later than the initial rally.

German inflation unexpectedly increased to 2.6% year-over-year, leading to two important conclusions. First, it suggests that Eurozone inflation is also likely to exceed forecasts. Second, it indicates that the European Central Bank (ECB) may not lower its rates in 2025 as quickly as the market anticipates. This point is naturally very favorable for the euro.

While the euro's rise appeared justified, predicting it was impossible. It's likely that market makers had access to insider information about German inflation, leaving ordinary traders uninformed. As a result, the currency pair surged toward the Senkou Span B line; however, the downward trend has not yet been invalidated. This week still has several significant reports that could help the dollar recover its losses.

Yesterday, quite a few trading signals formed on the 5-minute time frame. Upon closer inspection, almost all of them, except the last one, were executed almost perfectly. There's no need to list each signal separately; we can say that at least 125 pips could have been earned from the second rebound off the critical line and from the rebound off the Senkou Span B line alone.

COT Report

According to the latest Commitment of Traders (COT) report, dated December 24, there has been a change in the positioning of non-commercial traders. While their net position had remained bullish for an extended period, bears have recently taken the lead. Two months ago, the number of short positions among professional traders surged, resulting in a net position that has become negative for the first time in a long time. This indicates that the euro is now being sold more frequently than it is being bought.

We still do not see any fundamental factors supporting the strength of the euro. For an extended period, technical analysis has indicated a consolidation zone, leading to a sideways market. On the weekly time frame, it is clear that since December 2022, the currency pair has been trading between 1.0448 and 1.1274. However, the recent break below the 1.0448 level has created new opportunities for further declines.

Currently, the red and blue lines in the COT chart have crossed each other and switched positions, signaling a bearish market trend. During the latest reporting week, the number of long positions in the "non-commercial" group increased by 6,800, while short positions grew by 9,400, leading to a further decline in the net position of 2,600.

EUR/USD 1-Hour Analysis

In the hourly timeframe, the currency pair has resumed its downward trend but has experienced a sharp correction over the past two days. We believe that the decline will continue in the medium term. The Federal Reserve is expected to reduce its interest rate only once or twice in 2025, which indicates a much more hawkish stance than what the market has priced in. We still do not see any basis for a significant rally in the euro. The downward sentiment remains firmly in place below the Senkou Span B line.

On January 7, we highlight the following levels for trading - 1.0195, 1.0269, 1.0340-1.0366, 1.0485, 1.0585, 1.0658-1.0669, 1.0757, 1.0797, 1.0843, 1.0889, as well as the Senkou Span B (1.0440) and Kijun-sen (1.0342) lines. The Ichimoku indicator lines may shift during the day, which should be considered when identifying trading signals. Remember to set a Stop Loss at breakeven once the price moves 15 pips in the desired direction. This precaution will help mitigate potential losses if the signal is false.

On Tuesday, the Eurozone will release its December inflation report, which is a highly significant data point. If the figure exceeds forecasts, it could trigger a new rally for the euro. It's important that this rally happens after the report is published, unlike the premature movement observed on Monday. In the U.S., the ISM Services PMI and the JOLTs job openings report will also be released. Both of these reports are critical and are likely to elicit a market reaction.

Illustration Explanations:

• Support and Resistance Levels (thick red lines): Thick red lines indicate where movement may come to an end. Please note that these lines are not sources of trading signals.
• Kijun-sen and Senkou Span B Lines: Ichimoku indicator lines transferred from the 4-hour timeframe to the hourly timeframe. These are strong lines.
• Extreme Levels (thin red lines): Thin red lines where the price has previously bounced. These serve as sources of trading signals.
• Yellow Lines: Trendlines, trend channels, or any other technical patterns.
• Indicator 1 on COT Charts: Represents the net position size for each category of traders.