More Downside as Focus Turns to FOMC

The pair’s outlook is still bearish, with the next key support level to watch being at 1.0400.

Bearish View

• Sell the EUR/USD pair and set a take-profit at 1.0400.
• Add a stop-loss at 1.060.
• Timeline: 1-2 days.

Bullish View

• Set a buy-stop at 1.0550 and add a take-profit at 1.0650.
• Add a stop-loss at 1.0.480.

The EUR/USD pair dropped sharply as investors reacted to the hawkish interest rate decision by the European Central Bank (ECB) and the strong US inflation data. It dropped to a low of 1.0475, which was the lowest level since May 19^th.

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Fed Decision Ahead

The US dollar strengthened while stocks tumbled after data showed that American inflation was still surging. According to the Bureau of Labor Statistics (BLS), the headline consumer inflation rose from 8.3% to 8.6% in May. This figure was higher than the median estimate of 8.1% and it was the highest level in over 40 years.

The strong inflation data happened mostly because of the rising prices of energy and food prices. The price of most food items like eggs, milk, and meat has jumped by more than 10% in the past 12 months. At the same time, the cost of energy has also jumped sharply. During the weekend, Gass Buddy’s average of gasoline prices jumped to $5 for the first time on record.

These numbers came a day a week after the US published strong jobs numbers. The data revealed that the country’s unemployment rate remained at 3.6% in May as the economy added over 390k jobs. The participation rate remains strong.

Therefore, analysts believe that the Federal Reserve will continue tightening its monetary policy as planned in a bid to fight the soaring inflation. The Federal Open Market Committee (FOMC) will start its meeting this week and deliver a 0.50% hike. Some analysts are even pricing in a 0.75% rate hike.

The EUR/USD also declined as investors focused on the interest rate decision by the European Central Bank. The ECB left rates unchanged and signaled that it will start hiking in the coming month.

EUR/USD Forecast

The EUR/USD pair declined to the lowest level since May 19th after the latest consumer inflation data. It fell to a low of 1.0475 and managed to move below the symmetrical triangle pattern shown in black. The pair has also dropped below the 23.6% Fibonacci retracement level. At the same time, it has moved below the 25-day and 50-day moving averages.

Therefore, the pair’s outlook is still bearish, with the next key support level to watch being at 1.0400. A move above the resistance level at 1.0550 will invalidate the bearish view.