Bearish view

• Sell the EUR/USD pair and set a take-profit at 0.9840.
• Add a stop-loss at 0.9975.
• Timeline: 1 day.

Bullish view

• Set a buy-stop at 0.9965 and a take-profit at 1.0050.
• Add a stop-loss at 0.9900.

The EUR/USD price crashed to the lowest level in more than two decades as concerns about the European economy continued. It fell to a low of 0.9877, which was lower than last week’s high of 1.0035 as the divergence between the EU and the US continued.
 

US and EU divergence

The US and the European Union are moving in opposite directions as the war in Ukraine continues. Recent data from the US shows that the economy is holding on well. For example, on Friday, data revealed that the economy added more than 315k jobs in August while the unemployment rate rose slightly to 3.7%.

Additional data from the US revealed that the country’s consumer and producer inflation has started moving downwards as gasoline prices retreat. The headline CPI fell to 8.7% in July while the closely watched personal consumer expenditure continued falling. Durable goods orders and retail sales have been relatively well.

On the other hand, the European economy is facing a dire recession in the coming months. For one, Russia has decided to punish the bloc by halting gas supplies to the region indefinitely. As a result, many countries that depend on Russian gas will likely result to rationing and paying higher prices for gas from other countries.

Analysts believe that many companies, especially in the manufacturing sector will become uncompetitive and result in job cuts. Indeed, firms in the fertilizer and energy sectors are currently on life support.

Data published on Monday showed how dire the situation in Europe is. According to S&P Global, the bloc’s services PMI dropped from 51.2 in July to 49.8 in August. The composite PMI dropped to 48.8. Additional data showed that retail sales rose by 0.3% on an MoM basis in July and contracted by 0.9% on a YoY basis.

Therefore, the ECB is expected to struggle with its tightening process as the Federal Reserve continues hiking rates. Analysts expect that the Fed will hike by either 0.50% or 0.75% this month.
 

EUR/USD forecast

The EUR/USD pair has been moving sideways in the past few days. On the four-hour chart, the pair has found strong support at 0.9900. It has also moved below the 25-day and 50-day moving averages. This consolidation is part of the formation of the inverted cup and handle pattern.

Therefore, the pair will likely continue falling as the EU and US divergence continues. If this happens, the next key support level to watch will be at 0.9840.

(Click on image to enlarge)

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