EUR/USD exchange rate forecast: technical bias towards bulls after breaking out of wedge shape

The euro was flat against the dollar on Tuesday, weighed down by a steady strengthening of the greenback amid generally calm conditions. The pair traded near 1.1608, ending a six-day streak of gains after briefly hitting a more than two-week high on Monday.

In the absence of major US economic data on Tuesday, the market was light and traders reacted muted to preliminary eurozone inflation data. The latest data showed that the euro zone's harmonized consumer price index (HICP) rose 2.2% year-on-year in November, up from 2.1% in October; the core harmonized consumer price index rose 2.4% year-on-year, unchanged from the previous month. ING economist Bert Colijn pointed out in a note that the small increase in inflation is mainly due to the narrowing of the decline in energy prices, and does not mean that the European Central Bank will cut interest rates in December. "The current deflationary and inflation factors appear to be balancing each other, and the price level is still high enough to support further interest rate cuts," he said. Looking ahead, businesses expect prices to accelerate, especially in the services sector, but deflationary pressures should keep prices around current levels for the foreseeable future, with inflation likely to be below target in the coming months.

The divergence of monetary policy continues to shape the overall market outlook, with relatively little upward resistance to the exchange rate. The market generally expects the European Central Bank to keep interest rates unchanged at its monetary policy meeting on December 18, compared with the US market firmly believing that the Federal Reserve will start cutting interest rates at its meeting next week. From a macro perspective, the CPI data is unlikely to have a significant impact on the ECB's interest rate expectations. Francesco Pesole of ING agrees. In the case of the euro, there is a slight downside risk, but the exchange rate trend is likely to remain neutral; if the dollar weakens as expected, the EUR/USD exchange rate is expected to approach the 1.1700 mark again.

Looking ahead, the upcoming key economic data from both Europe and the United States this week may provide a new boost to the EUR/USD: For the Eurozone, traders will focus on Wednesday's producer price index (PPI) and HCOB composite purchasing managers' index (PMI), followed by Thursday's retail sales data, as well as Friday's quarterly employment change data and third-quarter gross domestic product (GDP) final; for the United States, Wednesday's Automated Data Processing Company (ADP) employment change data and the Institute for Supply Management (ISM) non-manufacturing PMI will be in the spotlight, while Friday's personal consumption expenditure (PCE) data will provide further clues to the Federal Reserve's monetary policy outlook. In addition, the progress of the Russian-Ukrainian peace talks this week remains the most closely watched topic in the euro-related field, and with US envoy Steve Witkov meeting with President Putin today, the market will have a clearer picture of the progress of the two sides to reach an agreement.

technical analysis

(EUR/USD daily chart, source: Internet)

From a technical point of view, the EUR/USD has maintained a constructive trend after breaking through and backtesting the falling wedge pattern, and is currently in the consolidation stage before a potential new round of upside. The 100-day simple moving average continues to limit the near-term upside, while the 21-day simple moving average plays a dynamic supporting role. The exchange rate needs to clearly break through the 100-day simple moving average to confirm the continuation of the bulls, and the next resistance is located near 1.1700.

On the downside, a fall below the 21-day simple moving average would lead to a flat or even slightly bearish short-term outlook. Momentum indicators support the current consolidation phase, but show that the bulls are gradually taking control: the relative strength index (RSI) has recovered to above 50, the moving average convergence divergence (MACD) is turning positive near the zero axis, and momentum is initially recovering.