Bearish view
- Sell the EUR/USD pair and set a take-profit at 1.0600.
- Add a stop-loss at 1.0750.
- Timeline: 1-2 days.
Bullish view
- Set a buy-stop at 1.0725 and a take-profit at 1.0800.
- Add a stop-loss at 1.0635.
The EUR/USD exchange rate formed a bearish engulfing pattern after last week’s economic numbers from the US raised stagflation concerns. The pair traded at 1.0700 on Monday morning as traders refocused on this week’s Federal Reserve decision and US non-farm payrolls (NFP) data.
Stagflation concerns
There are concerns that the American economy is going through stagflation, characterized by slow economic growth and a higher inflation rate.
According to the Bureau of Economic Analysis (BEA), the economy expanded by just 1.6% in the first quarter, missing the analysts' estimate of 2.5%. It was the first time it grew by less than 2% in the past six quarters.
A separate report published on Friday showed that inflation remained stubbornly high in March. The headline Personal Consumption Expenditure (PCE) inflation figure rose from 2.5% in February to 2.7% in March.
The core PCE figure rose to 2.8%, much higher than the Federal Reserve’s target of 2.0%. These figures rose as consumer spending continued rising during the month. Personal spending rose by 0.8% while income rose by 0.5%.
Therefore, there is a possibility that these numbers will impact the next actions by the Federal Reserve, which will start its two-day meeting on Tuesday.
Economists expect the Fed will leave interest rates unchanged between 5.25% and 5.50%. As such, this meeting will be important because it will provide more hints about when the next interest rate cut will happen.
Most economists see the Fed starting to cut in the third quarter while the European Central Bank is expected to start slashing in June.
The other important news will come out on Friday when the US will publish April’s jobs numbers. Economists expect the data to reveal that the economy created over 200k jobs in April as the unemployment rate remained at 3.8%.
EUR/USD technical analysis
The EUR/USD exchange rate rose to a weekly high on Friday and then pulled back after the strong US inflation data. On the daily chart, the pair has formed a bearish engulfing pattern, which is usually a sign of a reversal.
The pair has also formed a rising wedge pattern, which is shown in black. It has also moved below the 50-day Exponential Moving Average (EMA) and is sitting at its lowest swing on February 14th.
Therefore, the pair will likely have a bearish breakout ahead of the Fed interest rate decision. This view is also supported by the CoT report, which showed that hedge funds and other speculators became net negative on the euro for the first time since September 2022.
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