Key Insights:
- The deflationary pressures are expected to be short-lived.
- The appearance of a falling wedge pattern on the long-term chart supports a bullish outlook for EURUSD.
- The US dollar is poised for a potential collapse amid emerging bearish developments.
The US economy is facing a unique mix of inflationary and deflationary pressures, which could provide bullish implications for the EURUSD currency pair. In 2022, the US experienced a record-breaking inflation rate, the highest in 40 years. However, the recent collapse of Silicon Valley Bank has introduced deflationary pressure, causing the inflation rate to ease from its highs. This short-term deflationary pressure is expected to be transient, as data from the housing market reveals an improvement, with existing home sales on the rise. Furthermore, the US labor market is strengthening, with increased job numbers in March. These factors suggest that inflation remains a long-term concern, and although the Federal Reserve may not increase interest rates in the immediate future, the long-term outlook for higher interest rates could weaken the US dollar, providing support for an upward trend in EURUSD.
Technical analysis of the EURUSD chart also supports a bullish outlook for the currency pair. The combination of easing short-term inflation, potential interest rate hikes in the long term, and a strengthening labor market create an environment in which the US dollar may face challenges. This unique economic landscape, characterized by a delicate balance of inflationary and deflationary forces, presents an opportunity for the euro to gain momentum against the US dollar. As the long-term inflation outlook in the US remains uncertain, investors may seek refuge in the euro, further driving the EURUSD higher.
Exploring the Technical Reasons Behind EURUSD’s Bullish Trend
The long-term outlook of EURUSD
To gain a deeper understanding of the bullish outlook for EURUSD, a closer look at the monthly chart reveals the formation of a falling wedge pattern, which dates back to 2005. The falling wedge is a strong bullish pattern, but its formation occurs over a long-term basis, meaning that numerous fluctuations can be expected before the price moves higher. Notably, the bottom in EURUSD appears to be established at the robust support line of this falling wedge, and the subsequent rally has demonstrated considerable strength. The target for this rally is set between 1.16 and 1.17, but several obstacles must be overcome before this target is reached, as discussed in the chart below.
Upon examining the EURUSD data on a weekly chart, one can observe that the recent rally from the bottom of the falling wedge has given rise to an inverted head and shoulders pattern. The neckline of this pattern is situated at 1.1029 and is currently being tested. A breakout above this neckline would pave the way for higher prices, potentially allowing the rally to continue toward the 1.16-1.17 range. The Relative Strength Index (RSI) offers support at the 50 level, but it is now approaching the overbought region. Due to this overbought status, some corrections may occur in the short term, which could present buying opportunities for medium-term traders.
Short-term Perspective
Upon examining the EURUSD chart on a short-term basis, the daily chart offers more precise information, revealing a rising channel where any correction is anticipated to generate a buy signal. The 20-day and 50-day simple moving averages suggest that a bullish convergence may soon develop for this instrument. A pullback to the 50-day moving average at 1.074 is a strong buy signal.
Impending Collapse of the US Dollar Market
The EURUSD currency pair demonstrates an inverse relationship with the US Dollar Index, signifying that a weakening US dollar typically results in a strengthening EURUSD, and vice versa. Recent analyses and economic outlooks indicate an imminent collapse in the US dollar market, fuelled by factors such as unprecedented inflation rates, the downfall of Silicon Valley Bank, and uncertainties surrounding the US housing and labor markets. As the pressure on the US dollar intensifies, the EURUSD currency pair is expected to receive a substantial boost. Thus, both fundamental and technical indicators suggest that the declining US dollar will propel the euro higher, leading to a robust upward trend for the EURUSD.
The forthcoming deterioration in the US dollar market is evident in the updated chart below, which has been examined multiple times. The chart showcases the long-term trend line that was breached in 2015, followed by a significant surge in prices. This long-term trend line was tested repeatedly before the price escalation. The higher prices post-breakout gave rise to a rising channel, delineated by blue lines in the chart. Recently, the US Dollar Index reached the long-term target within the target region and has since been dropping. This decline in the US dollar is anticipated to persist, impacting the bullish prospects for EURUSD.
A comprehensive analysis of the US Dollar Index was conducted by outlining the symmetrical broadening wedge formation. This wedge displays a precise touch on the resistance area, with the price currently dropping from this resistance. The resistance also serves as a robust juncture in the monthly chart, as discussed earlier. At present, the US dollar has broken the ascending broadening pattern, marked in red on the chart. The breakout and subsequent retest of this pattern have emerged as a potent selling opportunity for the US Dollar Index, which is likely to continue its decline towards 90. This drop is expected to break the inverted head and shoulders pattern in EURUSD, leading to bullish implications for the currency pair.
The EURUSD currency pair is exhibiting a strong bullish trend in the wake of the US dollar’s collapse. The pronounced bullish price pattern indicates that any dip in the EURUSD should be regarded as a solid buying opportunity for traders. However, market uncertainties may pose considerable risks for short-term traders. One solution to mitigate this issue is to employ wider stop losses while diligently managing portfolio risk. A decline toward the 50-day simple moving average at 1.074 is likely to present a compelling buying signal. Nonetheless, the price may continue to climb higher if the neckline of the inverted head and shoulders pattern at 1.029 is breached. A weekly close above this level would be necessary to confirm a breakout.
As discussed above, the collapse of Silicon Valley Bank has sent shockwaves throughout the financial system, with the implications of this crisis expected to persist over the long term. Although the Federal Reserve may introduce liquidity into the financial system to address the crisis, the US dollar is likely to experience downward pressure due to persistent inflation. Higher interest rates may offer short-term benefits to the US dollar; however, the anticipation of slower economic growth, coupled with high inflation, could have adverse effects on the US economy. This negative impact on the US dollar serves to bolster the value of EURUSD.
In conclusion, the EURUSD currency pair is currently exhibiting strong bullish price action and is poised to advance further. Negative technical factors also support the bullish outlook for EURUSD in both the short and long term.