Bearish View
- Sell the EUR/USD pair and set a take-profit at 1.0400.
- Add a stop-loss at 1.0600.
- Timeline: 1-2 days.
Bullish View
- Buy the EUR/USD pair and set a take-profit at 1.0600.
- Add a stop-loss at 1.0400.
The EUR/USD pair has remained under pressure in the past few months as concerns about the European economy continued. It was trading at 1.0500, down from the year-to-date high of 1.1200.
Fed Fecision Ahead
The EUR/USD pair continued falling as the European economy decelerated. A report released on Friday showed that German exports dropped by 2.8%, while the European industrial production dropped by 1.2% on a YoY basis.
These numbers came a day after the European Central Bank (ECB) slashed interest rates for the fourth consecutive month. It cut the official cash rate to 3% and left the door open for more cuts in 2025.
The bank is working to fix an economy that is ailing. Germany, the engine that powers the European Union, has continued to de-industrialize, with a company like Volkswagen threatening to shut down two plants.
France, the second-biggest economy in the region, is also going through a political crisis, while the budget deficit has continued growing. Other European countries are not doing too well either.
The main catalyst for the EUR/USD pair will be Wednesday’s Federal Reserve interest rate decision. In it, economists expect that the Fed will also cut rates by 0.25% because of the deteriorating labor market.
The most recent data showed that the unemployment rose slightly to 4.2% in November, while the labor participation rate retreated slightly. Therefore, the Fed hopes that cutting rates will help to stimulate the economy.
The risk, however, is that inflation has remained stubbornly high. Recent data showed that core inflation remained at 3.3%, while the headline Consumer Price Index (CPI) rose to 2.7%.
The EUR/USD pair will likely react to a statement by Christine Lagarde and the flash manufacturing and services PMI data.
EUR/USD Technical Analysis
The EUR/USD exchange rate has pulled back sharply in the past few weeks. It dropped below the key support at 1.0602, its lowest level on April 16. The pair has also remained below the 50-day and 25-day moving averages.
Most importantly, it has formed a bearish flag chart pattern, a popular continuation sign. Therefore, the path of the least resistance is downwards, with the next point to watch being at 1.0400. A move above the resistance at 1.0550 will invalidate the bearish view.
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