Bullish view
- Buy the EUR/USD pair and set a take-profit at 1.0825.
- Add a stop-loss at 1.0680.
- Timeline: 1-2 days.
Bearish view
- Set a sell-stop at 1.0720 and a take-profit at 1.0650.
- Add a stop-loss at 1.0830.
A sense of fear spread in the financial market after Jerome Powell’s 60 Minutes interview in which he pushed back against rate cut expectations. The EUR/USD plunged to a multi-week low as the US dollar index (DXY) rally gained steam. It has fallen by 3.57% from its highest point this year.
Fed rate cuts hope ease
The EUR/USD plunged hard as traders moved to a risk-on sentiment after Jerome Powell warned that a rate cut will not happen in March as some analysts were expecting. This statement was in line with what he said last week when the Fed maintained interest rates unchanged between 5.25% and 5.50%.
The Fed has pledged to be data-dependent when making its rate cut call. Recent numbers have been quite strong, removing the urgency for rate cuts. For example, the labor market is still strong, with the unemployment rate stuck at 3.7% and wages rising by over 4.5%.
On Monday, a report by the ISM revealed that the non-manufacturing PMI rose to 53.4 in January from 50.5 in the previous month. This increase was better than the median estimate of 52.0. A separate report released last week showed that the manufacturing PMI rose above 50 for the first time in months.
These numbers mean that the economy is doing well, removing the incentive for the Fed to cut interest rates since inflation is still high.
The EUR/USD pair also retreated after data revealed that Europe was recovering at a slower pace than the US. According to S&P Global, the bloc’s services PMI retreated from 48.4 in December to 48.4 in January. The composite PMI stood at 47.9, signaling that it is contracting.
Therefore, there is a likelihood that the ECB will cut rates faster than the Federal Reserve in a bid to boost its economy. The most recent report showed that the bloc avoided a recession narrowly in 2023.
EUR/USD technical analysis
The EUR/USD pair crashed and retested the important support at 1.0722 on Monday. This was a crucial level since it was its lowest swing on December 8th. It was also at the oversold line of the Murrey Math Lines (MML) tool. It has remained below the 50-period moving average while the Awesome Oscillator has moved below the neutral level.
The pair has also dropped below the Ichimoku cloud. Therefore, the likely scenario is where it forms a dead cat bounce as some traders start buying the dip. If this happens, it will likely retest the resistance at 1.0820, the strong pivot of the MML.
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