Bullish View
- Buy the EUR/USD and set a take-profit at 1.0864.
- Add a stop-loss at 1.0640.
- Timeline: 1-2 days.
Bearish View
- Set a sell-stop at 1.0700 and a take-profit at 1.0650.
- Add a stop-loss at 1.0750.
The EUR/USD pair continued its recovery trend after the relatively weak US housing data and hawkish statement by Christine Lagarde. It is rising for the third straight day and is trading at 1.0734, which is the highest it has been since April 25th this year. It has jumped by more than 3% from its lowest point this year.
Monetary Policy Convergence
The EUR/USD has been in a strong recovery phase as investors react to the ongoing convergence between the European Central Bank and the Federal Reserve.
The Fed has already made its case that it will continue tightening its monetary policy in a bid to fight inflation. In a statement on Tuesday, the Fed chair reiterated that the bank will deliver a 0.50% rate hike in the upcoming meeting.
Meanwhile, after months of reluctance, the ECB has also become substantially hawkish in the past few weeks. The head of the Dutch Central Bank has said that the bank should hike rates by 0.50%. In a blog post on Monday, Christine Lagarde noted that the bank will likely start hiking in its July meeting.
The next major catalyst for the EUR/USD will be the latest minutes by the Federal Reserve. These minutes will show the depth of the deliberations that the Fed made in its most recent meeting. Still, with what we know, the impact of these minutes will be a bit muted.
The minutes will come at a time when data is showing that the American economy is slowing. Results by Target, Walmart, and Abercrombie & Fitch showed that the retail sector is struggling. Similarly, social media companies have come under pressure after signaling that ad spending is falling.
The other key data to watch will be the latest German GDP and American durable goods orders data that will come out today (Wednesday.
EUR/USD Forecast
The EUR/USD pair formed an inverted head and shoulders pattern for the most part of this month. It managed to move above the neckline of this pattern at 1.0640 this week. It has also risen above the 25-day and 50-day moving averages and is now approaching the 38.2% Fibonacci retracement point.
Therefore, the pair will likely keep rising as bulls target the key resistance level at 1.0867, which is along the 50% Fibonacci retracement level. On the flip side, a drop below the support at 1.0640 will invalidate the bullish view.
