On Cusp of Breakout to 1.03500

The pair will likely have a bullish breakout as buyers target the key resistance at 1.0350.

Bullish View

• Buy the EUR/USD and set a take-profit at 1.0350.
• Add a stop-loss at 1.0150.
• Timeline: 1-2 days.

Bearish View

• Set a sell-stop at 1.0160 and a take-profit at 1.000.
• Add a stop-loss at 1.03100.

The EUR/USD price remained in a tight range on Monday morning as investors repositioned for the new month. The pair was trading at 1.0226, which was higher than last month’s low of 0.9956 and last week’s low of 1.0099.

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ECB, Fed, and Inflation

The EUR/USD pair is in a consolidation phase as the market reflects on last month’s actions by the European Central Bank (ECB) and the Federal Reserve.

The ECB, in a surprise decision, decided to deliver its first interest rate by 50 basis points. This increase was bigger than the median estimate of 0.25%.

The Christine Lagarde-led bank also warned that it will continue hiking interest rates in the coming meetings in its bid to fight inflation. Preliminary data published on Friday showed that the bloc’s inflation continued soaring in July as the cost of energy accelerated. Inflation rose by 8.9%, which was the highest level recorded by Eurostat.

The EUR/USD is also consolidating as investors focused on last week’s decision by the Federal Reserve. In response to the rising inflation, the Fed decided to hike interest rates by 0.75% for the second straight month. This increase brought the year-to-date rate increase to 225 basis points, making it the most hawkish that the Fed has been in decades.

Like the ECB, the bank is fighting soaring inflation. Data published last Friday revealed that the US personal consumption expenditure (PCE) rose by 1% on a month-on-month basis in June this year. Core PCE, which excludes volatile food and energy, rose by 4.8%.

Still, there is a sense in which inflation is easing. For example, gasoline prices have moved from a high of $5 to about $4.3. Similarly, food prices and other key commodities like copper and iron ore have declined sharply in the past few weeks.

EUR/USD Forecast

The EUR/USD pair has been in a tight range recently. In this period, it has formed a descending channel that is shown in red. The current price is slightly below the upper side of this channel. It has also moved slightly above the 25-day and 50-day moving averages. The Relative Strength Index (RSI) has also been consolidating.

Therefore the pair will likely have a bullish breakout as buyers target the key resistance at 1.0350. A drop below the support level at 1.0165 will invalidate the bullish view.

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