Aggressive downtrend on the eurodollar, fast rate hikes on USD, and rising inflation. All that made EUR/USD fall by more than 10% two years in a row. This currency pair fell to levels not seen in 20 years! One euro now equals one dollar. Is this going to change soon?
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What do the charts say?
EUR/USD entered a strong downtrend in the second half of 2021 and has not stopped ever since. This most liquid currency pair has been falling for months now and has declined by almost 20% in about a year. The market even broke important support of 1.04 and dropped to parity (1:1). Now, where is the market standing? A huge engulfing pattern and solid pullback to the upside show signs of a long-needed relief rally.
Moreover, there is a bullish divergence that could help the eurodollar to rise in the next few weeks. If the technical analysis is correct, investors and traders could see a rise to at least 1.04, maybe even 1.08. Nevertheless, this is a very fundamentally-driven situation, so inflation data and interest rates will be the most important here.
The weekly timeframe shows a possibility of a huge engulfing pattern, and the daily timeframe shows the same. False breakout with immediate strong upward movement show the strength of bulls that was not seen for a long time. Some analysts expect EUR/USD to move to important resistance 1.04, where there is also a trend line, and then we may see if the downtrend continues or the party is over.
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Some form of pullback downwards is very anticipated as strong bear markets usually do not end in a blink of an eye. However, if the eurodollar breaks the 1.04 resistance and the trend line in the graph, it could continue to the next critical level 1.08, where there is also a moving average EMA200.
But what about the inflation and interest rates?
Inflation in the Euro Area is the highest it has been in decades, and people expect the European Central Bank (ECB) to do something about it. The inflation in the EU is almost as high as in United States, but Federal Reserve is already drastically raising interest rates while ECB is oversleeping this dangerous situation.
ECB will probably have to follow Fed’s steps and raise interest rates drastically to lower the raging inflation in the EU. It is hard to estimate how high the interest rates will have to go, but it could help the weak euro to gain some strength, which could result in a significant uptrend or consolidation of the eurodollar. As both Fed and ECB could be raising interest rates hard, it should stop the bloody downtrend on EUR/USD.
The bottom line
There were a lot of technical signals pointing to a continuous downtrend on the eurodollar, but this could change soon. This currency pair hit levels unseen in 20 years, and a strong dollar may be a double-edged sword.
While a powerful dollar is good for America, it could hurt American firms because their goods might become too expensive for foreign countries. That is why not just the ECB, but also Fed should work on strengthening the eurodollar currency pair. What do you think? Will EUR/USD stay above parity?