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Prepares for a Bearish Breakout

The EUR/USD will react to the preliminary European inflation data scheduled for Wednesday morning. 

Bearish view

  • Sell the EUR/USD pair and set a take-profit at 1.0750.
  • Add a stop-loss at 1.0935.
  • Timeline: 1-2 days.

Bullish view

  • Set a buy-stop at 1.0895 and a take-profit at 1.0950.
  • Add a stop-loss at 1.0750.

The EUR/USD price moved sideways on Wednesday with the focus now being the upcoming Fed decision. After dropping to a low of 1.0798 on Tuesday, the pair pulled back to 1.0867. It will likely show some increased volatility when the bank concludes its meeting and makes its first verdict of the year.

Fed decision ahead

The EUR/USD reacted to the latest outlook by the International Monetary Fund (IMF) and the relatively strong economic data from Europe. In a report, the IMF decided to upgrade its global economic outlook as it cited the falling inflation in most countries.

The economy will also be boosted by the recovering Chinese economy as the country reopens. It expects that the European economy will do modestly well because of the relatively stable natural gas prices. When it made its last economic outlook, expectations were that natural gas prices would push the bloc into a severe recession.

Eurostat also published encouraging economic numbers on Tuesday. The statistics agency said that the bloc’s economy expanded by 0.1% in the fourth quarter. This increase was much higher than the median estimate of a 0.1% contraction. On a year-on-year basis, the economy expanded by 1.9%. As such, there is increasing hope that Europe will avoid a recession.

The EUR/USD will react to the preliminary European inflation data scheduled for Wednesday morning. With natural gas plunging, economists expect that the headline and core inflation dropped by 0.3% and 0.2%, respectively. This decline is expected to translate to a 9.0% and 5.4% YoY increase.

The main event will be the Fed decision scheduled for Wednesday 19:00 GMT. Economists believe that the Fed will hike rates by 0.50% for the second straight meeting. It will then hint that there will be more rate hikes in the coming months.

EUR/USD forecast

The EUR/USD exchange rate has been rising in the past few months. Recently, however, the bullish trend has lost momentum as the market waits for the first FOMC decision of the year. As a result, the pair is consolidating at the 25-day and 50-day moving averages. It has also formed a rising wedge pattern while the Relative Strength Index (RSI) has formed a bearish divergence pattern.

Therefore, the pair will likely have a bearish breakout ahead of or after the FOMC decision. If this happens, the next reference level to watch will be at 1.0760.


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