- Sell the EUR/USD pair and set a take-profit at 1.0450.
- Set a stop-loss at 1.0650.
- Timeline: 1-2 days.
Bullish view
- Set a buy-stop at 1.0630 and a take-profit at 1.0725.
- Add a stop-loss at 1.0500.
The EUR/USD exchange rate dropped sharply after the hawkish tone by Jerome Powell. It suffered a harsh reversal as the US dollar index moved back to $105.42. The pair dropped to a low of 1.0570, the lowest point since March 1. It has dropped by 1.20% from its highest point this week.
Yield curve inversion continues
The EUR/USD pair crashed after the 2-year bond yield jumped to the highest level since 2007. At the same time, the 10-year bond yield rose above 4% for the first time since last week while the US dollar index jumped. American stocks declined sharply, with the Dow Jones crashing by more than 400 points.
This price action happened as investors adjusted their expectations of what the Federal Reserve will do. In his testimony in the Senate, Jerome Powell warned that the Fed will likely deliver more tightening in the next few months. He cited the need for the bank to bring inflation to about 2%. He said:
“Although inflation has been moderating in recent months, the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy.”
Therefore, forex traders believe that the Federal Reserve will hike interest rates by 0.50% in its meeting this month. Before his statement, the market was expecting the Fed to hike by 0.25% in the next three meetings.
Other hawkish Fed officials have maintained their tough talk on inflation. For example, James Bullard and Loretta Mester have advocated for more aggressive rates.
The implication of all this is that funds could continue moving to the US in a bid to attract superior returns. Besides, savings in dollars are yielding more than 5%. The EUR/USD pair will react to the second day of Jerome Powell's testimony and the latest ADP jobs numbers.
EUR/USD forecast
The EUR/USD pair started retreating on February 2 when it peaked at 1.1034. This retreat saw it fall to the key support level at 1.0534 on February 27. It now seems like its attempt to rebound has found a strong resistance at 1.0693, where it has formed a double-top pattern. The downward trend is still being supported by the 25-day and 50-day moving averages.
The Stochastic Oscillator and the Relative Strength Index (RSI) have pointed downwards. Therefore, the pair will likely continue pulling back ahead of Powell’s second day of testimony. The target will be at 1.0500.
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