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The euro has suddenly broken higher against the US dollar as the greenback crashes over inflation expectations due to the soft CPI and PPI prints this week.
Technically the EURUSD pair has broken to a new yearly high and also broken out into a new range. Currently the most widely traded pair looks set to test towards the 1.1500 area.
Deutsche Bank have raised their price forecast and are currently saying place the banks EURUSD forecast at 1.15 by end-2023, and higher to 1.20 is ‘entirely possible’. The forecast of 1.2000 is clearly very bullish.
They note that “the US CPI report on Wednesday means the Fed won’t need to hike as was previously thought, nor will the Fed need to hold rates high as long” and “the US inflation print is the last piece of evidence we have been waiting for to recommend going long EUR/USD again.“
Analyst at the bank also state that “we feel increasingly confident that the US disinflation process is well underway,” and they also say that “the disinflation process looks increasingly benign. We have been arguing that the most bearish outcome for the dollar is a combination of declining US inflation under relatively OK growth conditions.“
Personally, I would expect that the pair could eventually headed down towards 1.1500 level and then possibly 1.1800 later in the year if we see sustained inflation in the eurozone.
The ActivTrader Sentiment tool shows that 12% of traders are bullish on the EURUSD. This is still very bad if we consider that traders are still that bearish despite the ongoing price breakout.
As traders, we typically look to fade retail sentiment when it is overly skewed in one direction. This style of trading, fading sentiment, has been one of the most effective and used tactics of hedge funds.
The EURUSD is currently showing an extremely bullish technical development as it continues to rally the Ichimoku Cloud. The Lagging Line is also issuing a buy signal.
This above chart also shows clearly price needs to hold above the 1.1100 price area to keep the short-term trend for the EURUSD bullish, and to stop a steeper correction.
According to the daily time frame, the pair has formed and ignited a bullish inverted head and shoulders pattern.
As long as the pair trades above the neckline of the pattern, around the 1.1050 area, we are likely to see the pattern playing to its full project, close to the 1.1500 area.
