Bearish view

• Sell the EUR/USD pair and set a take-profit at 1.0717.
• Add a stop-loss at 1.0850.
• Timeline: 1-2 days.

Bullish view

• Buy the EUR/USD pair and set a take-profit at 1.0900.
• Add a stop-loss at 1.0750.

The EUR/USD price pulled back slightly in low volume as the market waited for important economic data from the US and Europe. It declined to 1.0816, which was a few points below its highest point this month. The pair has been in a strong uptrend after bottoming below parity in 2022.
 

Fed and ECB divergence?

The EUR/USD pair has been in a strong bullish trend as signs of a divergence between the Federal Reserve and the European Central Bank (ECB) emerged. The US has flashed several positive numbers that imply that the Fed will continue its pivot in the coming months. Inflation has dropped in the past six straight months while the unemployment rate has dropped to 3.5%.

On the other hand, European’s inflation remains at an elevated level. Data published earlier this month showed that inflation remains close to 10%. Therefore, analysts at ING believe that the bank will hike by 125 basis points in the first half of the year. It will then hold rates at that point until 2024. Their view reinforced what the Finnish central bank governor said last week. He believes that the ECB should stay its course on rate hikes.

As a result, ING analysts decided to change their outlook on the euro. After being bearish for a while, they now believe that the pair will continue its bullish trend this year. They cited the differentials or spread between interest rates in the US and Europe and the improving fundamentals in the block.

Recent data and news have hinted that Europe will avoid the recession that most analysts were afraid about. The energy shock that most people were fearing did not happen since Europe had adequate natural gas in storage. At the same time, winter was much warmer than expected and flows of LNG from the US and other sources have increased sharply in the past few months.
 

EUR/USD forecast

The EUR/USD pair has been in a bullish trend in the past few weeks. This rally faded this week as the pair formed a small double-top pattern. In price action analysis, this pattern is usually a bearish sign. The pair also remained slightly above the 25-day and 50-day moving averages. It is also slightly above the key resistance point at 1.0718, the highest point on December 30.

Therefore, the pair will likely retreat slightly and retest the key support at 1.0717. The stop-loss of this trade will be at 1.085.

(Click on image to enlarge)

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