Bullish view
- Buy the EUR/USD pair and set a take-profit at 1.080.
- Add a stop-loss at 1.045.
- Timeline: 1-2 days.
Bearish view
- Set a sell-stop at 1.0600 and a take-profit at 1.0500.
- Add a stop-loss at 1.0700.
The EUR/USD exchange rate darted higher during the American and Asian sessions after the strong American inflation numbers. It rose to 1.0675, the highest point since June 9, which was about 11% above the year-to-date low. Focus now shifts to the upcoming Federal Reserve decision.
Federal Reserve decision
The EUR/USD soared after the US published soft inflation data. As it rose, America’s Treasury Yields slipped while stocks staged a strong rally. According to the statistics agency, headline inflation dropped to 7.1% while core CPI fell to 6.0%.
Therefore, the US dollar index slipped as investors focused on the upcoming interest rate decision by the Federal Reserve and the European Central Bank (ECB). After two straight monthly inflation declines, economists expect that the bank will hike by 0.50%.
If this happens, the Fed will have hiked by 450 basis points in 2022, the biggest increase in decades. This increase will bring the official cash rate to 4.50%, the highest level in more than 14 years.
The next key event to watch will be Thursday’s ECB decision. Like other central banks, the ECB has been in a tightening phase in a bid to contain inflation. However, unlike the Fed, the ECB is struggling since inflation in the bloc is still in its double-digits. Also, Europe is expected to be in a steeper recession for a while.
Still, analysts at ING believe that the current EUR/USD rebound is a short squeeze as the market waits for a soft landing in 2023. It expects that the Fed will hike rates to 5% while the ECB will peak at 2.25% and then pause.
With Europe’s inflation at an elevated level and with recession risks rising, ING believes that the pair will end the year near the parity level.
EUR/USD forecast
The EUR/USD price has been in a strong bullish trend in the past few weeks. The rebound accelerated on Wednesday after the latest US inflation data. It has moved above the important parity level.
The pair jumped above the 25-day and 50-day moving averages on the daily chart. At the same time, the Relative Strength Index (RSI) has moved to the overbought level while the Awesome Oscillator has risen above the neutral point.
The pair will likely continue rising ahead of the Fed decision. This rally could see it rise to the psychological level of 1.100.
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