Is it safe to sell the euro after hitting a 20-year low against the US dollar?
- EUR/USD ends a descending triangle pattern
- There is no support until parity
- War in Ukraine weighs on the common currency
The US dollar flexes its muscles in the first trading week of July as it gains against all its peers. However, one currency pair, in particular, looks extremely weak – the EUR/USD.
All eyes are on the pair to hit parity after dropping to a 20-year low. So what does technical and fundamental analysis say about the next direction for the EUR/USD?
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A descending triangle’s measured move points to parity
A classic technical analysis bearish pattern just ended today. A descending triangle is a continuation pattern; in this case, it took the market from May to the start of July to consolidate.
But today’s drop below the horizontal support points to more weakness toward parity. A descending triangle’s measured move is the distance of its longest segment projected to the downside from the horizontal support level.
Fundamentals do not help the common currency either
The common currency fell to a 20-year low against the dollar. Euro is weak, and the market paired down the bets that the ECB will succeed in fighting inflation.
Even if the ECB raises the interest rate by 50bp in July, the interest rate differential between the Fed and the ECB will keep widening. As such, buying the US dollar remains a viable solution rather than buying the euro.
Besides the interest rate differential, the war in Ukraine also weighs on the common currency. Since February, the economic sanctions imposed by Western nations on Russia have negatively impacted the European economies.
As such, the ECB is faced with the option of tightening into a possible economic recession, and it appears that it missed its opportunity of raising rates earlier, as other central banks did.
To sum up, the EUR/USD breakout looks ugly and more downside is possible. There is only one thing on the table that may reverse EUR/USD fortunes: peace in Ukraine. But that is unlikely to happen anytime soon, so the road to parity is open.