Bearish view
- Sell the EUR/USD pair and set a take-profit at 1.0750.
- Add a stop-loss at 1.0865.
- Timeline: 1-2 days.
Bullish view
- Set a buy-stop at 1.0830 and a take-profit at 1.0900.
- Add a stop-loss at 1.0750.
The EUR/USD exchange rate rose to the two-week high of 1.0888 and then quickly pulled back as traders continued to reflect on the Federal Reserve minutes. The pair was trading at 1.0820 on Monday morning.
Fed and ECB expectations
The EUR/USD pair was a bit volatile last week as the Federal Reserve published minutes of the last meeting and Europe released the January inflation report. Fed minutes revealed that most Fed officials were concerned about cutting interest rates so soon.
These members warned that inflation remained too high, with the core CPI being almost double the Fed’s target of 2.0%. Therefore, there is a likelihood that the bank will hold rates stable for longer than expected.
This is the message that the bond market is sending. The 10-year Treasury yield has risen to 4.24% while the 30-year has jumped to 4.36%. Further, the yield curve has continued to invert, with the spread between the 10-year and 2-year moving to minus 44.20 basis points.
The Fed’s challenge is that while inflation is still high, there are signs that the economy is slowing. Retail sales and industrial production numbers have missed estimates in the past few months.
Meanwhile, European data have painted a picture of an economy that is slowing. Inflation numbers released on Thursday revealed that the headline CPI dropped to 2.8% and is moving in the right direction.
However, the manufacturing PMI in the bloc and other key countries like Germany and France remained below 50. Therefore, a combination of falling inflation and slow economic growth means that the ECB will have an incentive to cut rates soon.
There will be no major economic data from the US and Europe on Monday. The only data set to come will be the latest US new home sales numbers. Economists expect the report to show that new home sales rose from 664k in December to 675k in January.
EUR/USD technical analysis
The EUR/USD pair formed an inverse hanging man pattern last week after the latest FOMC minutes. The upper side of this pattern was at 1.0888. It then pulled back and moved to the lower side of the black ascending channel shown in black.
The pair has remained above the 25-period and 50-period averages. However, it has also formed a bearish flag and a head and shoulders pattern. Therefore, the outlook for the pair is bearish, with the next target to watch being at 1.0750.
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