Bearish view
- Sell the EUR/USD pair and set a take-profit at 1.0750.
- Add a stop-loss at 1.0850.
- Timeline: 1-2 days.
Bullish view
- Set a buy-stop at 1.0815 and a take-profit at 1.0900.
- Add a stop-loss at 1.0750.
The EUR/USD pair dived sharply after the European Central Bank (ECB) started cutting interest rates and after the US published strong jobs data. It retreated to the psychological level of 1.0800 ahead of the upcoming Federal Reserve interest rate decision.
Fed and ECB divergence?
The EUR/USD pair retreated as investors reacted to last week’s ECB interest rate decision. In its meeting, the bank decided to slash interest rates by 0.25% to 3.75%. Officials did not provide more information on when the next rate cut will happen.
Analysts are cautious on when this will happen since there are signs that the bloc’s inflation is rising. The most recent data shows that the headline Consumer Price Index (CPI) by 2.6% YoY in May from 2.4% in April.
In a statement, analysts at ING noted that this was not the beginning of a rate cut cycle, meaning that rates could remain at the current level for a while. The bank’s analysts characterized the ECB’s decision as a hawkish cut.
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Further, the pair retreated after the latest European elections in which right-wing parties won big. In France, the second-biggest European economy, Macron called for a snap election that puts his administration at risk.
The EUR/USD pair also crashed hard after the US published strong economic numbers. According to the Bureau of Labor Statistics (BLS), the economy created 272k jobs in May, higher than the median estimate of 182k. The average hourly earnings continued rising during the month.
These numbers came as the Federal Reserve prepares to deliver its June interest rate decision on Wednesday. Unlike the Fed, most analysts expect the Fed will leave interest rates unchanged between 5.25% and 5.50%.
Therefore, there are signs that the Fed will remain hawkish for a while, which explains why bond yields have jumped. The 10-year yield rose to 4.43% while the 30-year and 5-year rose to 4.55% and 4.46%, respectively.
EUR/USD technical analysis
The EUR/USD exchange rate dived sharply last week after the ECB decision. It dropped below the ascending trendline that connects the lowest swing in April last year. At the same time, the pair has moved below the 50-period moving average and is nearing the crucial support level at 1.0787, its lowest swing on May 30th.
This was an important level since it was the neckline of the triple-top pattern at 1.0895. Therefore, the pair will likely continue falling ahead of the Federal Reserve decision. If this happens, the next point to watch will be at 1.0750.
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