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The EUR/USD pair dropped after the ECB hike since investors interpreted it as a very dovish increase.
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- Sell the EUR/USD pair and set a take-profit at 1.0600.
- Add a stop-loss at 1.0750.
- Timeline: 1-2 days.
- Set a buy-stop at 1.0690 and a take-profit at 1.0725.
- Add a stop-loss at 1.0600.
The EUR/USD exchange rate was hovering at its lowest level since June this year as the US dollar strength continued. It was trading at 1.0660, significantly lower than its July high of 1.1270.
The main drivers for the EUR/USD pair were the latest US inflation data and the European Central Bank (ECB) decision. In a report, the Bureau of Labor Statistics (BLS) said that inflation remained sticky in August. The headline consumer price index (CPI) jumped to 3.7% as gasoline prices rose.
Meanwhile, in Europe, the ECB decided to hike interest rates by 0.25% to 4%, the highest point on record. In its statement, the bank noted that inflation remained stubbornly high and that more tightening was needed.
Europe is facing significant challenges, especially on energy. Like other countries, it is being affected by the rising crude oil prices. Brent, the international benchmark, rose to $93 last week and analysts believe that it will rise to $100.
European gas prices have also roared back, helped by the strike in Australia. At the same time, liquidity in the banking sector has dropped to the lowest level in years. As such, there is a likelihood that the bloc will move to a recession this year. Germany, the biggest economy in the bloc has already contracted in the pat two straight quarters.
The EUR/USD pair dropped after the ECB hike since investors interpreted it as a very dovish increase.
Looking ahead, there will be several important US and European economic numbers on Tuesday. Eurostat will publish the final European inflation figure while the US will release the latest housing starts data.
The main catalyst that will move the EUR/USD will be the upcoming Federal Reserve decision. Some analysts expect the bank will hike by 0.25% while others expect it to deliver a hawkish pause.
The EUR/USD exchange rate has been in a strong bearish trend in the past few months. It has formed a descending channel shown in red. The pair has also formed a bearish flag pattern, which is a worrying sign for euro bulls. It has also moved below the 50-period moving average while the MACD has dropped below the neutral point. It also formed a head and shoulders pattern.
Therefore, the pair will likely have a bearish breakout, with the next level to watch being at 1.0600. In the upper side, the next level to watch is at the upper side of the descending channel.
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