The EUR/USD exchange rate has surged in the past few months as the US dollar index (DXY) crashed to the lowest level in years. After falling to a low of 1.01750 in January, it has surged by over 11% to the current 1.1350. So, will the EUR to USD pair keep soaring ahead of the European Central Bank (ECB) decision?
ECB interest rate decision
The EUR/USD exchange rate has jumped in the past few weeks as investors waited for the upcoming ECB decision.
Economists expect the bank to continue its interest rate cuts as the region braces for more weakness because of the ongoing trade war between Europe and the United States.
If this happens, it will slash the deposit facility rate from 2.5% to 2.25% and the official interest rate from 2.65% to 2.40%. The marginal lending rate has moved from 2.9% to 2.65%.
ECB officials are concerned about the state of the economy as the trade war between the United States and Europe intensifies. Donald Trump has placed a 25% tariff on European cars, steel, and aluminium.
He has also placed a 10% tariff on all goods from the region, a move that will affect trade volume worth billions of euros a year.
Europe has largely avoided responding to Trump’s tariffs as they seek for a negotiated solution. However, officials have warned that they have a package to respond to these tariffs, including their version of reciprocal tariffs.
Therefore, the ECB hopes that its interest rate cuts will help to cushion the economy this year if the fallout accelerates. Bloomberg analysts said:
“The ECB is facing a world that’s significantly different from the last time it met, as US tariffs become a reality, and monetary policy for the euro area will have to adapt.”
Federal Reserve next actions
The Federal Reserve, on the other hand, is between a rock and a hard place as stagflation concerns remain. Recent data showed that inflation remains at an elevated level, with the recent data showing that core CPI remained above 2.5% in March.
Economists believe that the US inflation will continue rising as companies adjust their prices to match those of tariffs. This explains why Trump decided to pause tariffs on smartphones and other electronics.
Therefore, for now, the Fed has more work to do than the ECB. In a statement on Wednesday, Jerome Powell, the Fed Chair, said:
“If that were to occur, we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close,”
EUR/USD technical analysis
The EUR/USD pair has surged as the US dollar index has plunged to a low of $99. It has formed an inverse cup and handle pattern, pointing to an eventual crash to $90 in the coming months.
The EUR/USD exchange rate has formed a cup and handle pattern, a popular bullish continuation sign. This pattern is comprised of a horizontal resistance and a rounded bottom.
It has already moved above the upper side of the cup, validating its forecast. The pair has also remained above the 50-day and 100-day moving averages. Also, the MACD and the Relative Strength Index (RSI) have all pointed upwards, a sign that they have the momentum.
Therefore, the most likely scenario is where the pair retreats to the upper side of the cup and then resume the bullish trend. This pattern is known as a break-and-retest, which often leads to a continuation. Eventually, the pair will jump to 1.2240. This target is established by measuring the depth of the cup and the same distance from its upper side.
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