Bearish view

• Sell the EUR/USD pair and 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.

(Click on image to enlarge)

The EUR/USD exchange rate retreated for four consecutive days after the US published strong consumer price index (CPI) data. It also slipped to 1.0495 ahead of the upcoming European Central Bank (ECB) decision.
 

US inflation and ECB interest rate decision

The EUR/USD pair retreated after a report by the Bureau of Labor Statistics (BLS) published strong inflation data. These numbers revealed that the headline Consumer Price Index (CPI) rose from 0.2% in October to 0.3% in November. This increase translated to an annual increase of 2.7%, higher than the previous 2.6%.

Core inflation, which excludes the volatile food and energy, remained at 0.3% and 3.3% on a MoM and YoY, respectively. These numbers mean that the country’s inflation is no longer falling and is taking longer than expected to move to the Fed’s 2% target.

The CME Fed Rate Monitor Tool shows that economists have a 94.7% chance that the Fed will cut interest rates by 0.25% in its meeting next week. Most analysts then expect it to maintain them steady for a while as officials observe inflation trends.

The EUR/USD pair dropped ahead of the upcoming ECB decision. Economists expect the bank to cut interest rates by 0.25% to 3.0%.

The ECB is under pressure because of the deteriorating economic conditions in the region. Countries like France and Germany are on the verge of a recession as industrial production continues to fall. Therefore, the bank hopes that the rate cuts will help the economy recover.
 

EUR/USD technical analysis

The EUR/USD exchange rate has been in a strong downward trend after rising to a high of 1.1200 in September. It dropped and bottomed at 1.0332 in November and then bounced back to a high of 1.0628.

The pair has retreated and moved below the important support at 1.0540, the 23.6% Fibonacci Retracement level. It has moved below the 50-day and 100-day Exponential Moving Averages (EMA) and 1.0600, its lowest swing in April.

Therefore, the path of the least resistance for the EUR/USD pair is downwards, with the next support level to watch being the psychological point at 1.0400. The stop-loss of this trade will be at 1.10600.

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