EUR/USD analysis: relief rally expected as bearish momentum wanes
- The EUR/USD has been in a deep sell-off lately.
- The pair declined as investors reflected on the latest US inflation data.
- The pair will likely have a relief rally next week.
The EUR/USD dropped for three consecutive days as investors reflected on the rising global inflation and the possibility of more central bank tightening. The pair is trading at 1.1450, which is the lowest levels since July 2020. It has fallen by about 7.37% from its highest level this year.
The US dollar continued its bullish momentum as the market reacted to the latest US consumer inflation data.
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On Wednesday, data by the American statistics bureau showed that the headline consumer price index (CPI) rose by 6.2% in October. This was a bigger increase than the median estimate of 5.8% and the previous month’s increase of 5.4%. It was also the biggest increase since 1991.
The core CPI, which excludes the volatile food and energy prices, also rose from 4.2% in September to 4.6% in October.
Similarly, inflation has jumped in Europe. On Thursday, data by Destatis showed that German inflation rose from 4.1% in September to 4.5% in October. This was the highest level since 1990. On Friday, data from Spain showed that prices rose by 5.8% in October.
There are three main reasons why inflation has surged recently. First, energy prices have jumped to multi-year highs. Crude oil prices have risen to the highest level in seven years.
At the same time, natural gas prices have risen to a record high in the past few weeks. This trend could go on as tensions between the European Union and Russia rise.
Second, there is a global shortage of key parts like computer chips. These chips are used in vehicles and other machines like dishwashers and microwaves. Third, there is a major supply logjam because of the rising demand as ports come under pressure.
Federal Reserve under pressure
Therefore, the EUR/USD is falling since investors expect that inflation will keep rising and push the Fed to tighten further. This is evidenced by the rising bond yields in the US. The 10-year bond yield rose to 1.53% while the 30-year rose to 1.93%.
In its meeting last week, the Fed decided to leave interest rates unchanged between 0% and 0.25%. In addition, the bank decided to start tapering its quantitative easing (QE) program by $15 billion.
Therefore, with inflation surging, and with the unemployment rate falling, the bank will likely start accelerating its tapering program in the coming months. Data published this month showed that the US unemployment rate fell from 4.8% in September to 4.6% in October.
EUR/USD technical analysis
The daily chart shows that the EUR/USD pair has been in a major downward trend in the past few days. The pair has even crossed the key support at 1.1532, which was the lowest level on October 12. The pair has also moved below the 25-day and 50-day moving averages. However, the stochastic oscillator has crashed to the oversold level.
A closer look shows that the bearish momentum is easing. For example, it dropped by 1% on Wednesday following by 0.30% on Thursday. It has fallen by less than 0.05% today. Therefore, there is a likelihood that it will have a relief rally on Monday.
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