EURUSD sell-off targets 1.3840

Yesterday’s US Consumer Price Index (CPI) report surprised markets with a slowdown to 3.5%, against expectations of 3.8%. Core year-on-year readings also declined, hitting 2.6%. Such results immediately took the wind out of the dollar’s sails, allowing EURUSD to jump above the consolidation level, with a 1.1420 target.

However, local bullish momentum does not give us reason to lose our heads. The pair’s medium-term macroeconomic and fundamental conditions remain murky and call for a cautious approach.

The unexpected dip in the US inflation rate was probably triggered by a temporary drop in crude prices during a short-lived truce in the Middle East. The peace agreement lowered local expectations of interest rate hikes by the Federal Reserve (Fed). Nevertheless, the central bank’s new chair, Kevin Warsh, does not seem ready to give up just yet. In his speech to Congress, he made it clear that the regulator will not tolerate persistently high inflation. Given the recently renewed military actions in the Persian Gulf and another oil rally, June’s CPI slowdown could soon be written off as a short-term anomaly. The old scenario is likely to return in the coming months, with elevated consumer prices and the Fed’s hawkish stance. 

It cannot be denied that the brief dollar pullback gave EURUSD a much-needed breather, but, sadly, this is not enough. Fundamentally, the euro remains fragile. A fresh wave of Middle East tensions, combined with the very real prospect of the Strait of Hormuz being blocked again, would hit the eurozone economy far harder than that of the US. A sharp increase in gas and crude prices could deal a heavy blow to the industrial sectors of Germany and other countries of the bloc. Under these circumstances, the European Central Bank (ECB) may raise its deposit rate, but the region’s economic downturn would cap the single currency’s long-term recovery.

The overall recommendation is to sell EURUSD. Profits should be taken at 1.13840. Stop Loss could be set at 1.14635.

The volume of the open position should be calculated so that the potential loss (protected by a Stop Loss order) does not exceed 1% of your deposit. If your account balance does not allow opening a position of this size, it is better to avoid entering the market on this signal and wait for other trade options that meet low-risk criteria.