Bearish view
- Sell the EUR/USD and set a take-profit at 1.0450.
- Add a stop-loss at 1.0640.
- Timeline: 1-2 days.
Bullish view
- Set a buy-stop at 1.0550 and a take-profit at 1.0600.
- Add a stop-loss at 1.0450.
The EUR/USD exchange rate continued its freefall as the risk-off sentiment gained steam and the US dollar index (DXY) surged. The pair retreated to a low of 1.0500 on Thursday morning, the lowest level since January this year.
US dollar strength continues
The EUR/USD pair has been in a strong downward trend as risks to the economy continued. For example, there are risks of a government shutdown as divisions in Congress continue. In a report this week, Moody’s warned that a shutdown could trigger a rate downgrade. S&P Global slashed the country’s Triple A rating in 2011 while Fitch downgraded it a few months ago.
Further, there are inflation risks as the price of energy bounces back. The price of West Texas Intermediate (WTI) has jumped by more than 20% from the lowest level in June while gasoline is nearing $4. At the same time, wages are expected to keep rising as strikes by unions continue. It is hard to fight inflation in a period of rising wage growth.
There are other risks to the economy. For one, the Federal Reserve has hinted that it will deliver another 0.25% rate hike this year. If this happens, it will push rates to 5.75%, the highest level in more than two decades.
The rising interest rates have pushed more individuals and companies to move from the euro to the safety of the US dollar. Besides, savings in US dollars has better returns than those in euro. Also, investors and companies believe that the dollar is a safe haven.
The EUR/USD pair retreated after the strong US durable goods orders. Durable goods rebounded by 0.2% in August after falling by 5.6% in July. Core durable goods orders also rose by 0.4%, higher than the median estimate of 0.1%.
The key data to watch on Thursday will be the latest German and Spanish consumer inflation data and the latest US GDP data.
EUR/USD technical analysis
The EUR/USD exchange rate has been in a steep sell-off in the past few months. In this period, it has dropped from the year-to-date high of 1.1274 in July to this week’s low of 1.0500. It has slipped below the key support at 1.0640 (May 30th low) and 1.0517 (March 8th low).
The downtrend is being supported by the 50-period and 25-period weighted moving averages (WMA) while the Relative Strength Index (RSI) has moved below the oversold level of 25. Therefore, the pair will likely continue falling as sellers target the key support at 1.0450.
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