EUR/USD forecast: Inverted cup and handle signals more downside
- The EUR/USD pair has been in a deep sell-off in the past few months.
- It is falling because of the EU exposure to Russia.
- The inverted cup and handle pattern points to more weakness.
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The euro has been in a sharp decline in the past few days as concerns about the European economy remain. The EUR/USD has crashed in the past six straight days and is trading at the lowest level since 2020.
The same trend is seen among other pairs. EUR/CHF has fallen to the lowest point since 2015 while the EUR/CAD has dropped to the lowest level since April 2017.
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European economic growth
The main reason why the euro has crashed is that the European economy is directly affected by the ongoing crisis in Ukraine. In the past two weeks, Russia has continued its invasion of the country, leading to significant sanctions.
Therefore, there are concerns about stagflation as the invasion goes on. For example, analysts believe that the bloc’s inflation will remain at elevated levels in the coming months. For one, crude oil has surged to the lowest level in more than 10 years while European gas is trading at an all-time high.
Sadly, this is happening at a time when the European inflation is trading at an all-time high. As such, the potential for further escalation will increase.
Therefore, there are concerns about stagflation, which happens when high inflation is accompanied by slow economic growth. In such a period, the European Central Bank (ECB) will struggle to intervene.
Rate hikes could be a bit difficult to implement without affecting the bloc’s economy. At the same time, rate cuts will lead to a higher consumer and producer inflation.
The EUR/USD is falling because of the rising demand for the US dollar, which is often seen as a safe haven. The dollar index has climbed to the highest point in months, as investors anticipate a more hawkish Federal Reserve.
The weekly chart shows that the EUR/USD pair has been in a strong bearish trend in the past few weeks. As a result, the pair has managed to crash below the 25-week and 50-week exponential moving averages (EMA).
A closer look shows that the pair is forming what seems like an inverted cup and handle pattern, which is usually a bearish sign. The Relative Strength Index (RSI) has moved slightly below the oversold level.
Therefore, for now, the path of the least resistance for the pair is lower, with the next key support level to watch being at 1.06.