Bullish view
- Buy the EUR/USD pair and set a stop-loss at 1.0795.
- Add a stop-loss at 1.0580.
- Timeline: 1-2 days.
Bearish view
- Set a sell-stop at 1.0600 and a take-profit at 1.0500.
- Add a stop-loss at 1.0725.
The EUR/USD exchange rate crashed to the lowest point since February 13 as investors assessed their bets on the next Federal Reserve actions. This decline happened after a series of strong economic numbers from the United States.
Fed to remain hawkish for a while
The main view in the market earlier this year was that the Federal Reserve would start cutting interest rates later this year as inflation eases. In this period, Fed officials have always warned that it was too early to speculate when these cuts will come.
However, a series of hot numbers have led traders to change this view. Earlier this month, data showed that the country’s jobs numbers were stronger than expected. The economy added over 500k jobs in January while the unemployment rate dropped to 3.4%. Wage growth remained significantly higher than expected.
And on Tuesday, data revealed that inflation remained sticky even as prices retreated slightly. The headline and core inflation dropped slightly on a year-on-year basis even as they rose on a monthly basis. These figures were all higher than expectations.
On Wednesday, numbers showed that retail sales remained robust in January. The headline retail sales rose by 3% in January while core sales jumped by 2.3%. Retail control numbers rose by 1.7%. Therefore, these numbers show that Americans are doing pretty well despite the challenges facing the economy.
As a result, investors anticipate that the Fed will hike rates by 0.25% in March and possibly pause in May this year. A rate cut may not come later this year after all. Still, the biggest risk in the economy is the fact that the yield curve has inverted to the lowest level in decades. That is usually a sign that the economy will move to a recession in the next few months.
EUR/USD forecast
The EUR/USD exchange rate has been tracked as I predicted in this report. In that article, I noted that the pair has formed a broadening wedge pattern, which is typically a bullish sign. The pair has moved below the 50-period moving average and is approaching the lower side of the wedge. It also moved below the 61.8% Fibonacci Retracement level. The RSI is approaching the oversold level.
Therefore, I suspect that the pair will likely resume the bullish trend on Thursday as buyers target the upper side of the wedge at 1.0795. However, a move below the lower side of the wedge will signal that sellers have prevailed.
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