Bullish view
- Buy the EUR/USD pair and set a take-profit at 1.1900.
- Add a stop-loss at 1.1625.
- Timeline: 1-2 days.
Bearish view
- Sell the EUR/USD pair and set a take-profit at 1.1625.
- Add a stop-loss at 1.1900.
The EUR/USD exchange rate continued its strong comeback, reaching its highest level since October 1, as investors predicted potential divergence between the Federal Reserve and the European Central Bank (ECB). It rose to a high of 1.1740, much higher than the November low of 1.1463.
ECB and Federal Reserve Divergence
The EUR/USD pair continued rising as odds that the Fed and the ECB will diverge on interest rates rise. In its interest rate meeting last week, the bank decided to cut interest rates by 0.25%, with officials pointing to one cut next year.
Most analysts predict more cuts than that as Trump will replace Jerome Powell with a chair who will likely prefer cutting rates. This official, however, will need to convince other FOMC members to cut as officials have started dissenting.
On the other hand, analysts expect the European Central Bank to start hiking interest rates later in 2025, with inflation expected to soften more during the year.
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Looking ahead, the EUR/USD pair will react to several important macro events this week. There will be key economic numbers from the European Union, including inflation and flash manufacturing and services PMI data for November.
Most importantly, the European Central Bank will deliver its final decision of the year on Friday. Economists expect the bank to leave interest rates unchanged and point to a potential hike in the final quarter of next year.
Meanwhile, the United States will publish several important numbers, which will help to determine the next Fed policy. For example, the Bureau of Labor Statistics (BLS) will release the latest non-farm payrolls (NFP) data on Tuesday.
Analysts expect the report to show that the economy added 55k jobs in October as the unemployment rate remained unchanged at 4.4%. The US will then release the latest inflation report on Friday.
EUR/USD Technical Analysis
The daily timeframe chart shows that the EUR/USD exchange rate has been in a strong uptrend in the past few months, moving from a low of 1.1463 in November to the current 1.1740. It has formed an inverse head-and-shoulders pattern, a common bullish reversal sign.
The pair has also risen and crossed the 50-day Exponential Moving Average (EMA) and the Supertrend indicator. Also, the Average Directional Index (ADX) has moved to 18, its highest level since November 6, a sign that the uptrend is strengthening.
Therefore, the most likely scenario is where the pair continues rising as bulls target the year-to-date high of 1.1912. A drop below the 50-day moving average at 1.1625 will invalidate the bullish outlook.
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