EUR/USD forecast: death cross nears ahead of Fed, ECB decisions

The EUR/USD exchange rate continued its strong downward trend, reaching its lowest level since November last year. It dropped to 1.1495, down sharply from the year-to-date high of 1.2080. This retreat may continue as the Iranian war continues.

Europe pressured as war in Iran pushes energy prices higher 

The EUR to USD exchange rate has plunged recently as investors focused on the ongoing Iranian war that has pushed energy prices substantially higher.

European countries are highly exposed to this crisis as they mostly rely on energy from Middle East countries, especially after Russia’s invasion of Ukraine. 

The bloc now mostly imports most of its gas from Qatar and other Middle East countries. These products have now been cut off as Iran has closed the vital Strait of Hormuz.

Therefore, there is a likelihood that the European industrial base will be impacted, as evidenced by the recent job cuts by Volkswagen. 

As a result, consumer inflation will likely resume rising, undoing the progress made by the European Central Bank (ECB).

The next key catalyst for the EUR/USD pair will be the upcoming ECB interest rate decision, which will come out next week. Economists expect the bank to leave interest rates unchanged at 2.15% and the deposit facility rate to 2%.

A report released on Friday showed that most economists expect the bank will leave interest rates unchanged through 2028. That survey was at odds with what market participants expect as it is pricing in a quarter-point hike by July this year. In a note, a Bloomberg analyst said:

“A hike could still materialize this year if the shock were to persist and rising inflation expectations were to show signs of entrenchment.”

Federal Reserve interest rate decision 

The other important catalyst for the pair will be the upcoming Federal Reserve interest rate decision on Wednesday next week.

This decision comes after the US published mixed economic data. A report showed that the labor market deteriorated in February as the economy shed over 92,000 jobs as the unemployment rate rose to 4.4%.

Another report released this week showed that the headline and core Consumer Price Index (CPI) rose 2.4% and 2.5% in February. On the positive side, core inflation dropped on a MoM basis.

However, analysts are now expecting inflation to rebound as energy prices jump. A top analyst expects that inflation may jump to over 3.4% if inflation continues rising.

The Federal Reserve is now in a bind. An interest rate cut would drive inflation higher by boosting consumer spending. On the other hand, a rate hike would push the economy deep in red.

EUR/USD technical analysis

EURUSD pair chart | Source: TradingView

The daily chart shows that the EUR to USD pair has been in a steep crash as investors moved to the US dollar. It has slumped from a high of 1.2080 in January to the current 1.1483. 

The pair dropped below the ascending trendline that links the lowest swings since July last year. It is about to form a death cross pattern as the spread between the 50-day and 200-day Weighted Moving Averages (WMA).

The Average Directional Index (ADX) has jumped to 33, a sign that the downtrend is accelerating. Therefore, the pair will likely continue falling as sellers target the key support level at 1.1390, its lowest level in July last year.