The EUR/USD currency pair grew quite strongly on Wednesday evening, but on Thursday it began a new round of decline. Recall that the results of the Fed meeting were announced on Wednesday evening, and in the last article we did not consider its results and did not analyze the change in the euro/dollar exchange rate. We said that the reaction could be the exact opposite of what traders expect. And so it turned out. Although the Fed raised the rate by 0.5%, and also announced its readiness to start reducing its balance sheet (the reverse QE program of QT), the US dollar did not feel any support. We also said in recent articles that the US currency is already too overbought, and the euro is oversold. Whatever the fundamental, macroeconomic, and geopolitical factors, the euro has fallen very much in recent months and there are already questions about whether it has fallen excessively? Of course, the European economy is in a much greater "risk zone" compared to the American one. The military conflict in Ukraine and the sanctions imposed against the Russian Federation affect the European economy very much, but they practically do not affect the American economy. Therefore, on the one hand, the fall of the euro and the rise of the dollar are logical. On the other hand, the latest GDP reports showed that the US economy contracted in the first quarter, while the European economy grew. Therefore, this is a double-edged sword.

Now the European Union is also on the verge of imposing an oil embargo on Russia. This is, of course, a powerful sanctions blow, but it is also a blow to the EU economy. Now the European Union, which imported most of its oil and gas from Russia, will have to buy hydrocarbons from other countries. And the problem is not just that logistics chains will become more complicated and prices will rise, the problem is that it is far from a fact that it will be possible to get the same volumes in other countries that came from the Russian Federation. After all, it is unlikely that one or even several countries will be able to increase production volumes by two or more times in a couple of weeks or months. And even if it can, will it want to? Thus, it seems that it is the fear of the future of the European economy that is now putting the greatest pressure on the euro currency.

The Fed did not surprise traders with anything.

The results of the Fed's May meeting were not surprising. The rate was raised by 0.5%, and Jerome Powell announced a possible increase of 0.5% in June and July. In addition, in the coming months, the Fed will begin to reduce its balance sheet by $ 95 billion per month. That is, the reverse quantitative easing program will begin. All decisions made and announced plans are "hawkish". Therefore, it was very strange to see the fall of the US currency. But we warned that these steps were known to traders for a long time and no one doubted that they would be accepted and announced. Thus, these changes in monetary policy could already be taken into account in the euro/dollar exchange rate. Therefore, the US currency did not show a much more logical growth.

If the dollar was falling on Wednesday evening, it was rising on Thursday morning. As a result, by Thursday evening, it returned to almost the same positions from where the movement had started days earlier. This is exactly what we warned about in the last article: the market can first move in one direction, and then easily and simply return to its original position. Separately, I would like to note the performance of Jerome Powell. Again, he didn't say anything that the markets didn't know. The head of the Fed noted the high risks posed by the military conflict in Ukraine, and also noted that "lockdowns" in China further complicate supply chains, which leads to an even greater increase in prices. He also noted the shortage of labor, which provokes wage growth, which in turn stimulates inflation. In general, the Fed will try to influence external factors with the help of internal monetary policy. We believe that inflation will practically not decrease in the coming months, and will decrease slightly by the end of the year. The period of high prices can drag on for many years.

The average volatility of the euro/dollar currency pair over the last 5 trading days as of May 6 is 106 points and is characterized as "high". Thus, we expect the pair to move today between the levels of 1.0619 and 1.0406. A reversal of the Heiken Ashi indicator upwards will signal a new round of corrective movement.

Nearest support levels:

S1 – 1.0498

S2 – 1.0376

S3 – 1.0254

Nearest resistance levels:

R1 – 1.0620

R2 – 1.0742

R3 – 1.0864

Trading recommendations:

The EUR/USD pair is trying to maintain a downward trend. Thus, now you should stay in short positions with targets of 1.0406 and 1.0376 until the Heiken Ashi indicator turns up. Long positions should be opened with a target of 1.0742 if the price is fixed above the moving average line.

Explanations of the illustrations:

Linear regression channels - help determine the current trend. If both are directed in the same direction, then the trend is strong now.

Moving average line (settings 20.0, smoothed) - determines the short-term trend and the direction in which trading should be conducted now.

Murray levels - target levels for movements and corrections.

Volatility levels (red lines) - the likely price channel in which the pair will spend the next day, based on current volatility indicators.

CCI indicator - its entry into the oversold area (below -250) or into the overbought area (above +250) means that a trend reversal in the opposite direction is approaching.