Bearish view
- Sell the EUR/USD pair and set a take-profit at 0.9900.
- Add a stop-loss at 1.0050.
- Timeline: 1-2 days.
Bullish view
- Set a buy-stop at 1.0010 and a take-profit at 1.0100.
- Add a stop-loss at 0.9950.
The EUR/USD price moved sideways during the American and Asian sessions after a hawkish statement by Christine Lagarde. It also consolidated as the market waited for the upcoming Federal Reserve interest rate decision. It was trading at 0.9963, which was lower than last Friday’s high of 1.0052.
Fed decision ahead
Central banks have turned increasingly hawkish as they continue their battle against inflation. In Europe, the European Central Bank (ECB) has made two rate hikes this year. In a statement on Tuesday, Christine Lagarde hinted that the bank may need to hike to a level that restricts economic growth.
In its meeting this month, the ECB some policymakers made the case of pushing interest rates above the neutral point. The ECB defines the neutral rate to be between 1.5% and 2%, which is much higher than the current level of 0.75%.
On Tuesday, Sweden’s Riksbank surprised the market when it made a historic 100 basis points as it continued to fight inflation. This is notable since Sweden is part of the European Union.
Focus now shifts to the Federal Reserve, which will conclude its two-day meeting on Wednesday. Economists believe that the Fed will continue hiking as inflation remains stubbornly high. Most analysts expect that it will hike by 0.75% while others see a historic 100 basis point hike being in the cards.
The two-year bond yield, which is often a key indicator of short-term interest rates rose to 4% for the first time in more than 15 years. In the same period, the 10-year yield rose to 3.56% while the 30-year jumped to 3.57%.
The main catalyst for the pair will be the dot plot, which shows where interest rates are heading in the coming months. Most analysts expect that the bank will hike by 0.50% in the final two meetings of the year.
EUR/USD forecast
The EUR/USD pair dropped to a low of 0.9960 in the overnight session. On the four-hour chart, it formed a bearish flag pattern that is usually a bearish sign. It has also moved below the 25-day and 50-day moving averages. The Awesome Oscillator has moved below the neutral point.
Therefore, there is a likelihood that the pair will have a bearish breakout towards and after the Fed decision. If this happens, the next key reference level to watch will be at 0.9900.
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