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Bearish view
Sell the EUR/USD pair and set a take-profit at 1.1300.
Add a stop-loss at 1.1430.
Timeline: 1-2 days.
Bullish view
Buy the EUR/USD pair and set a take-profit at 1.1430.
Add a stop-loss at 1.1300.
The EUR/USD pair continued its strong downward trend and crossed below a crucial support level of 1.1430. It has retreated substantially because of the strong US dollar and the potential carry trade opportunity.
Potential Carry Trade Opportunity
The EUR/USD pair continued its recent retreat because of the potential carry trade opportunity after last week’s Federal Reserve interest rate decision. The bank decided to leave rates unchanged between 3.50% and 3.75%, continuing a trend that started late last year.
This decision came a few days after the European Central Bank (ECB) delivered its interest rate decision. It hiked interest rates by 0.25% to counter the elevated inflation rate. Traders anticipate that the bank will not hike interest rates later this year as the economy is slowing.
Data released on Tuesday showed that the manufacturing and services PMIs retreated this month. The Eurozone services PMI came in at 48.9, a sign that it is in a contraction mode. Also, the manufacturing sector PMI dropped to 51.3 from the previous 51.6.
On the other hand, a report from the US showed that the economy was doing well. The services and manufacturing PMIs rose to 51.3 and 55.7, respectively, a sign that the two sectors were growing.
These numbers, together with the recent consumer inflation and retail sales numbers, there is a likelihood that the Federal Reserve will hike interest rates later this year.
Such a move will lead to a carry trade opportunity, where investors will borrow the low-yielding euros and invest in the higher-yielding US dollar.
There will be no major macro data from the United States and Europe later today. As such, traders will focus on the upcoming US GDP and PCE reports on Thursday this week.
EUR/USD Technical Analysis
The daily chart shows that the EUR/USD pair has been in a steep crash in the past few weeks. It has now plunged below the crucial support level of 1.1430, its lowest level in May. This price was the lower side of the cup-and-handle pattern.
The pair has formed a death cross pattern as the 50-day and 200-day Exponential Moving Averages (EMA) cross each other. This pattern often leads to further downside.
Therefore, the pair will likely continue falling, potentially to the key support level of 1.3600. A move above the resistance at 1.1430 will invalidate the bearish outlook.
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