EUR/USD Forecast: Signal As Hopes Of Fed And ECB Divergence Rise
The EUR/USD price continued surging this week as the US dollar index, DXY, plunged to the lowest level since last year. The pair has risen in the past seven straight days and moved to the highest level since February 2022.
Fed and ECB divergence
The EUR to USD exchange rate has been in a strong bullish trend in the past few months. This rally continued this month after the US published a series of weak economic numbers.
Jobs data showed that the labor market was losing steam even as the unemployment rate dropped to 3.6%. The economy added over 209k jobs in June while the statistics bureau slashed the previous two month’s estimates.
Meanwhile, inflation data published this week warned that the US could move into deflation in the next few months. First, Chinese data showed that inflation stood at 0.0% in June and there is a likelihood that the situation will get worse.
In the United States, the headline consumer price index data dropped to 3.0% from th previous month’s 4.1%. It has dropped from a peak of 9.1% during the pandemic. Therefore, if the trend continues, there is a likelihood that inflation will move below 2% soon.
Therefore, a combination of falling inflation, soft labor market, and an inverted yield curve mean that the Fed has little room to continue hiking interest rates. I expect it to hike by 0.25% this month and then take a strategic pause.
Therefore, the EUR/USD pair has jumped since the scenario is different in Europe. While Spain’s inflation has dropped below 2%, most countries are seeing strong inflationary pressure. Therefore, the ECB still has at least two more hikes to implement.
EUR/USD technical analysis
EURUSD chart by TradingView
The weekly chart shows that the EUR to USD pair has been in a strong bullish trend in the past few months. It has now moved slightly above the important resistance level at 1.1104, the highest point on April 24th. Most importantly, the pair jumped above the 200-week moving average, signaling that buyers are still in control.
Therefore, the outlook for the pair is bullish, with the next level to watch being at 1.1500. A drop below the support at 1.1100 will invalidate the bullish view.
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