EUR/USD fluctuates in a narrow band at around 1.0850 early Monday. 1.0800 aligns as key technical support level for the pair. Market action could remain subdued ahead of this week's key macroeconomic events. EUR/USD is struggling to gain traction and moving sideways near 1.0850 after closing the second consecutive week in negative territory. The pair's near-term technical outlook shows no signs of a recovery yet as market participants remain on the sidelines ahead of the Federal Reserve policy meeting and high-tier macroeconomic data releases.

And there we have it. This week will see January in the books, and what a week it promises to be. Not only do the Fed and the Bank of England (BoE) claim the central bank spotlight—both of which are anticipated to hold the line—plenty of macro market movers will grace the economic calendar throughout the week. Robust US economy According to the first estimate for US GDP for Q4, economic activity remains resilient. Real GDP rose more than expected at an annualised rate of 3.3%, tearing through the median estimate of 2.0% (down from 4.9% in Q3). Adding to this, manufacturing and services PMIs are now both in expansionary territory (> 50.00). Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, commented: 'Confidence has also been buoyed by hopes of lower inflation in 2024, easing the cost-of-living squeeze and facilitating the path to lower interest rates. With prices rising in January at the slowest rate since the initial pandemic lockdowns of early 2020, companies report that selling price inflation is now below the pre-pandemic average and consistent with consumer price inflation dropping below the Fed's 2% target'. With US consumers clearly gaining confidence (as per the University of Michigan)—a 78.8 print for the month of January, its highest point since mid-2021—and core PCE inflation slowing to 2.9% YoY, this is not an economy on the edge of a recession right now and plays into the soft-landing narrative. Aside from the Fed's rate decision on Wednesday at 7:00 pm GMT, another interesting watch this week will be Friday's non-farm payrolls release at 1:30 pm GMT. The household survey's unemployment rate (January) is expected to tick higher to 3.8% from 3.7%, and employment change is anticipated to show an increase of 173,000 new payrolls in January versus December's 216,000 jump. A softer-than-expected reading here is likely to weigh on the buck as rate-cut forecasts could increase. Fed expected to hold Fed funds target range unchanged Unless you were hiding under a rock in December, the Fed's policy meeting delivered a dovish shift with its latest economic projections. The Summary of Economic Projections (SEP) revealed that FOMC market participants project three rate cuts this year, or 75bps, up from 50bps previously forecasted. There remains a somewhat disconnect between the Fed and the market here, nevertheless, with OIS pricing around 130bps of cuts this year, and the first 25bp cut expected to emerge in the second half of Q2. For the upcoming meeting, markets are fully priced in for another no-change, leaving the Fed funds target range at 5.25%-5.50% for a fourth consecutive meeting. A point of note for investors is whether we see Fed Chair Powell push back against a March rate cut, which, given the latest economic data, is now about a 50/50 call for the markets. BoE anticipated to hold the bank rate at 5.25% The Bank of England (BoE) will be live on Thursday at midday GMT. It is expected that the central bank will maintain the current Bank Rate of 5.25%. Although talks of rate cuts are not expected, the central bank could begin to strike more of a dovish tone. This may come in the form of language change in the accompanying rate statement—the central bank is likely to maintain the sentence 'Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with the Committee's remit', but may remove the sentence reflecting the need to increase the Bank Rate if needed. We might also see the three dissenters (Megan Greene, Jonathan Haskel and Catherine Mann) vote to keep rates unchanged (all three voted to increase the Bank Rate at December's policy meeting). Market pricing, according to OIS, forecasts a potential 25bp cut in June with around 100bps of cuts priced in for the year (or four rate cuts). Inflation remains a problem for the UK. The latest report from the Office for National Statistics (ONS) revealed that headline YoY inflation rose to 4.0% in December, twice the BoE's 2.0% inflation target and now level with France (4.1%), but still higher than Germany at 3.8%. Core CPI, which strips out food, energy, alcohol and tobacco, matched November's release and rose by 5.1% in December YoY. Services inflation remains an issue, of course, with the latest release revealing yet another month north of 6.0% on a YoY basis for December. Consequently, the BoE are likely to exercise caution. Overall, a language change in the Rate Statement could weigh on sterling. Likewise, a change in the MPC Bank Rate votes might also rattle the pound this week. G10 FX (5-day change): Source: TradingView

Gold price tests bearish commitments near $2,030 on the renewed upside. Further Middle East geopolitical escalation underpins Gold price in the Fed week. Gold price rebound could be limited amid daily bearish technical indicators.   Gold price is back in the green early Monday, having posted two straight weekly losses. Gold price is staging a modest rebound, courtesy of the further escalation intensifying in the geopolitical tensions between the Middle East and the United States (US). Geopolitical risks intensify in the Federal Reserve week Investors set off the critical week, including the US Federal Reserve (Fed) policy announcements, on a cautious footing after a Reuters report quoted US President Joe Biden and officials stating that three US service members were killed and dozens may be wounded after an unmanned aerial drone attack on US forces stationed in northeastern Jordan near the Syrian border. Biden said, "while we are still gathering the facts of this attack, we know it was carried out by radical Iran-backed militant groups operating in Syria and Iraq." "Have no doubt - we will hold all those responsible to account at a time and in a manner of our choosing," he added. Markets remain wary of the US response to this escalation by the Iran-backed militia while they keenly await the all-important Fed interest rate decision on Wednesday. Against this backdrop, Gold price jumped but the renewed upside appears in check, as intensifying geopolitical risks boost the safe-haven demand for the US Dollar as well. Further, the recent series of strong US economic data helped pared back bets for a March Fed rate cut, acting as a headwind for the non-interest rate-bearing Gold price. Markets are currently pricing in about a 48% probability that the Fed will deliver a rate cut in March, down from a 60% chance seen a week ago. Also, optimism about more stimulus coming in from China faded, as the country's property market concerns resurfaced. "A Hong Kong court on Monday ordered Evergrande, the world's most indebted property developer, to liquidate, a ruling that could further dent foreign investor confidence in China," per the Washington Post (WaPo). However, Gold price could find continued support if the risk-off market mood intensifies and bumps up the safe-haven flows into the US government bonds, extending the decline in the US Treasury bond yields. The US Dollar could also feel the pain from the falling US Treasury bond yields, with the 10-year benchmark US yields currently losing 0.70% on the day to trade below 4.15%. The US economic docket is relatively light on Monday, and hence, the geopolitical developments and the pre-Fed positioning could influence the Gold price action. Gold price technical analysis: Daily chart As observed on the daily chart, Gold price is headed to challenge the critical supply zone at $2,030, which is the intersection of the 50-day Simple Moving Average (SMA) and the 21-day SMA. Gold buyers need a daily candlestick closing above the latter to initiate a meaningful recovery toward the static resistance near the $2,038 level. Further up, the psychological $2,050 level will likely come into play. With the 14-day Relative Strength Index (RSI) indicator, however, still below the midline, Gold buyers remain cautious. Additionally, the 21-day SMA is on the verge of crossing the 50-day SMA from above, which if happens will confirm a Bear Cross. On the downside, an immediate cushion is seen at the rising trendline support of $2,011, below which the $2,000 barrier will be retested. The next strong downside target is seen around the $1,975 region.

In what is anticipated to be an exceedingly hectic macro meets mega-cap tech period for markets, the last thing investors needed to deal with was another significant Middle East Flash Point. The ongoing conflict between Israel and Hamas has the potential to escalate into a more significant regional and international crisis. Three U.S. service members were killed, and dozens may be wounded after an unmanned aerial drone attack on U.S. forces stationed in northeastern Jordan near the Syrian border, President Joe Biden and U.S. officials said on Sunday. Biden blamed Iran-backed groups for the attack, the first deadly strike against U.S. forces since the Israel-Hamas war erupted in October and sent shock waves throughout the Middle East. Reuters Sunday's incident marked a significant escalation in the ongoing conflict, occurring shortly after Kataib Hezbollah's aggressive assault on the Al Asad Air Base in Iraq, which resulted in evaluations for brain damage among American soldiers and support personnel. In response, the U.S. military, under Lloyd Austin's leadership, carried out what they termed as "necessary and proportionate strikes" on three facilities as a retaliatory measure. President Biden condemned the drone attack as "despicable" and reaffirmed America's commitment to honouring fallen soldiers and holding those responsible accountable. While the specifics of the proxy responsible for the attack remain unclear, the situation underscores the complex dynamics involving breakaway factions from the Popular Mobilization Forces (PMF) operating under the banner of the "Islamic Resistance in Iraq," which includes Kataib Hezbollah and Al-Nujaba, active in Syria. These groups receive support from Hezbollah and, ultimately, the Quds. The deaths of three Americans on Sunday mark the first known casualties of the current conflict attributed to Iran's proxies in Iraq and Syria, representing a grave escalation. While the Pentagon may label any response as "proportionate," it's evident that participating U.S. forces will aim to neutralize threats decisively. Meanwhile, the Houthis' continued attacks on ships in the Red Sea, including a tanker carrying Russian fuel, have prompted ongoing U.S. airstrikes in Yemen. Iran's actions risk inviting a more robust U.S. air campaign against its regional assets, highlighting the precariousness of the situation and the potential for further escalation. Concerns about the risk of miscalculation are growing, as rational actors may unintentionally become entangled in an escalatory spiral. Given the inherent complexity of Middle East conflicts, achieving a stable outcome in the region appears unlikely at this stage, signalling the potential for continued instability with broad global repercussions where higher oil prices are the chief concern, especially in a severe supply disruption scenario, where maritime traffic in the Strait of Hormuz is chocked leading to significant rise in prices. Asia open Investors in Asia are grappling with significant questions this week, chief among them being the sustainability of the renewed optimism towards China and the Federal Reserve's stance on potential U.S. interest rate cuts. The market's sentiment towards China has experienced a rebound, prompting speculation on its longevity and implications for regional investments. Additionally, there is growing market speculation regarding the Federal Reserve's stance, with some anticipating imminent U.S. interest rate cuts. The central bank's forthcoming decisions will validate or temper this burgeoning belief, influencing investor strategies and Asian market dynamics.

Despite generous economic data last week, the US Dollar Index was tiresome. The week settled marginally higher, adding +0.2%, but it barely scratched out a fresh higher high and largely remained within the previous range (check weekly chart). Monthly chart: Technical observations on the monthly timeframe are largely unchanged from previous writing (and will likely remain so in Q1). You may recall from previous writing that the FP Markets Research Team aired the following (italics): Structures worth monitoring are support at 99.67 (backed up by a moderate Fibonacci cluster nearby at 98.72) and October's (2023) peak at 107.35 as a possible resistance, with a breach here exposing another layer of resistance at 109.33. It is important to underline that the monthly timeframe displays a clear view of the longer-term trend, which, despite lacklustre movement since early 2023, is north alongside momentum remaining just above positive (> 50.00), as per the Relative Strength Index (RSI). Daily chart: Resistance at 103.62 on the daily timeframe has seen its fair share of upside attempts in recent trading; this horizontal base shares space with the 200-day simple moving average (SMA) at 103.50. Equally interesting is support at 102.92 on the daily chart, a base that's working closely with the 50-day SMA at 102.83 (note that this level boasts more of a significant history than the aforementioned resistance, delivering a support/resistance area since August 2023). While price action recently signalled an early uptrend on the daily chart (higher low followed by a subsequent higher high), a Death Cross also formed at the beginning of the year (50-day SMA crossing below the 200-day SMA), signalling a longer-term downtrend, and the RSI pencilled in negative hidden divergence last week (usually indicates a continuation move to the downside and seldom forms in overbought regions). Venturing south of the 50.00 centreline would help confirm this signal. Direction this week? Supporting bulls, we have the long-term trend to the upside on the monthly scale, and the daily timeframe's trend also shows signs of reversing north. In addition, the RSI indicator on the monthly timeframe is rebounding from its 50.00 centreline. This could support a move beyond the 200-day SMA/daily resistance (103.62) this week to aim for 104.15 resistance on the daily. The evidence for dollar bears this week, on the other hand, consists of the scope to move lower on the monthly timeframe to support at 99.67, negative hidden divergence from the daily chart's RSI, and the combination of daily resistance at 103.62 and the 200-day SMA. Technically, the unit could venture either side of daily support and resistance (102.92 and 103.62, respectively) this week, opening the door to support at 101.77 or resistance at 104.15. Consequently, while some may opt to play the range, conservative traders are likely to wait until a defined breakout unfolds. Source: TradingView

The European Central Bank maintained its monetary policy unchanged, sounding mostly dovish. The United States Federal Reserve will announce its decision on monetary policy next week. EUR/USD keeps signaling a bearish breakout, but investors remain cautious. The US Dollar was the overall winner this past week, with EUR/USD falling towards the 1.0800 mark on Friday. A slew of United States (US) macroeconomic data and the European Central Bank (ECB) monetary policy announcement were behind the pair's decline.  Investors started the week with optimism, as the earning season in the US reflected the country's economic resilience. Most big names reported better-than-expected results, leading to record highs on Wall Street. The upbeat tone of equities and the absence of relevant macroeconomic releases throughout the first half of the week limited demand for the USD and kept major pairs within familiar levels. Clearer clues emerged Optimism persisted, but the US Dollar surged on Thursday following the release of the preliminary estimate of the Q4 Gross Domestic Product (GDP). The Bureau of Economic Analysis (BEA) reported that the economy grew at an annualized pace of 3.3% in the three months to December, much better than the 2% anticipated. Furthermore, the Core Personal Consumption Expenditures – Price Index (PCE) held at 2% for a second consecutive quarter, far from the peak of 6% reached in mid-2021. At the same time, the ECB announced it left rates unchanged, as widely anticipated. The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility remain unchanged at 4.50%, 4.75% and 4.00%, respectively. The accompanying document showed that "The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner" and that "future decisions will ensure that its policy rates will be set at sufficiently restrictive levels for as long as necessary," repeating the well-known message. Furthermore, President Christine Lagarde reiterated that it would be premature to talk about rate cuts, although she was mostly dovish, weighing down the Euro. Lagarde said rapid wage growth was already showing signs of slowing in the Eurozone, adding that "the disinflation process is at work." Regardless, and after the dust settled, money markets increased bets on rate cuts, with expectations of a 50 basis points (bps) reduction by June and a 140 bps by the end of the year. Finally on Friday, the US unveiled the December Core Personal Consumption Expenditure – Price Index. The annualized figure posted 2.9%, easing from 3.2% in November and below the 3% expected. MoM, Core PCE inflation rose 0.2%, as expected. At the end of the week, the US Dollar gave back some of its weekly gains amid risk appetite, as growth and inflation-related figures maintained investors in optimistic mode. Still, it is worth noting the American economy is much healthier than the European one. There is little doubt the US dodged a recession, and even the chance of a soft landing has fallen. Across the Atlantic, however, the EU economy is still in contraction mode. Financial markets opt to trade on sentiment, but it won't take long until the US Dollar imposes its established strength. Fed, Payrolls and GDP in the docket The focus now shifts to the Federal Reserve (Fed). The US central bank will announce its decision on monetary policy next Wednesday, with financial markets hoping for additional clarity on rate cuts. The Federal Open Market Committee (FOMC) will most likely opt to maintain key interest rates at current levels at the conclusion of its upcoming meeting on January 31. The Fed has held rates steady since last July, following aggressive tightening measures to combat inflation. Ever since, the central bank has been cautious about signaling a pivot in the monetary policy, although the dot plot released in December anticipates three potential rate cuts this year. Speculation hovers around the odds for a March cut. Such odds fluctuate with macroeconomic figures and Fed officials' words, although authorities have been mute these last few days amid the blackout period before the meeting. Following this week's figures, market players bet there is a 50% chance of a rate cut in March, according to the CME FedWatch Tool. Beyond the Fed´s announcement, the next week will bring several critical figures that could set the tone for EUR/USD. On Tuesday, Germany and the Eurozone will publish the preliminary estimates of the Q4 Gross Domestic Product (GDP). The EU economy is expected to have contracted by 0.1% in the three months to December, somehow reflecting the poor economic conditions and reaffirming Lagarde's cautious stance. Next, Germany will unveil December Retail Sales and the preliminary estimate of the January Harmonized Index of Consumer Prices (HICP), expected at 3.5% YoY, down from 3.8% final in December. The EU will publish the HICP for the...