EURUSD appears to be stuck in a downtrend. The outlook for the pair remains bearish due to a critical divergence in economic conditions between the United States and the European Union.
The US Federal Reserve (Fed) continues to adhere to hawkish rhetoric. Budget deficit concerns and inflation risks have caged borrowing costs in the 3.50%–3.75% range. The dollar is now basking in glory, being the most profitable reserve currency among its peers. Meanwhile, the European Central Bank (ECB) has fallen into a stagflation trap. The regulator was left with little choice but to turn more dovish in order to support the German industrial sector, despite soaring consumer prices. As a result, the interest rate differential is widening in the greenback’s favor, triggering capital outflows from the single currency.
Let’s dive deeper into the eurozone’s situation. Inflation keeps heating up again due to surging costs of imported energy resources. To be honest, the combination of elevated consumer prices and sluggish economic conditions appears to be the worst-case scenario. While the US can boast its steady inflation figures (3.2%) backed by strong domestic demand, along with resilient GDP growth (+2.1%), Europe seems to be teetering on the edge of recession (+0.2%...-0.1%). Consequently, the Fed has more room to maneuver and maintain a hawkish stance compared to the ECB. Another important factor favoring the US is the AI boom in the tech sector, which continues to attract substantial investment.
Unemployment in America remains near all-time lows at 3.8%. The EU, in contrast, faces looming problems in this area due to rising fuel costs. This fundamental advantage of the US economy makes the dollar stand out even more.
Being a net energy importer, Europe is extremely susceptible to sudden fluctuations in oil prices. The higher they get, the weaker the euro becomes. The analogy of a “consumption tax” applies here, while the dollar remains largely unaffected. From time to time, gold may rally alongside the greenback amid escalating geopolitical tensions. It is a rare situation where investors completely overlook the single currency, preferring USD or the precious metal instead. All in all, soaring oil prices are now a key headwind for the euro and a major tailwind for the dollar.
The overall recommendation is to sell EURUSD from the 1.16700 resistance level. Profits should be taken at 1.15700. Stop Loss could be set at 1.17400.
Always size the position so that your potential loss (protected by Stop Loss) is no more than 1% of your account balance. If you can't open a position that meets such a risk criterion, it's safer to skip this trade and wait for a better, lower-risk opportunity.
This content is for informational purposes only and is not intended to be investing advice.
