3 reasons to buy the EUR/USD

EUR/USD holds remarkably higher considering everything going on in Europe. First, it was the COVID-19 pandemic, and traders bought the US dollar as the world’s safe-haven currency.

Next, the measures to tackle the pandemic have led to inflation reaching higher levels than the central bank’s target. Finally, the Russia-Ukraine war triggered a wave of sanctions that will affect the European economies too and contribute to further upside in inflation.

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Yet, despite all these, the EUR trades above 1.09 against the USD. Now that the Fed is preparing to tighten the monetary policy even more, is it wild to buy the EUR/USD here? Here are three reasons to do so:

• EUR/USD formed a bullish pattern
• Bullish RSI divergence
• Inflation in the US is much higher

Falling wedge formation hints at a bounce

The daily chart reveals a falling wedge pattern that started at the end of last year. The key to interpreting the pattern is to wait for the market to break the 2-4 trendline before trading it.

Falling wedges are bullish patterns. After the price breaks above the 2-4 trendline, it usually continues in the same direction until at least reaches the highs in the second segment.

In other words, a bullish trade would be to go long on a break above the 2-4 trendline, meaning above 1.10, and target a move in the 1.15 area. On the flip side, if the price reverses and moves below 1.08 again, the pattern gets invalidated.

Bullish RSI divergence

Another factor favoring more upside in the EUR/USD pair is a bullish divergence with the RSI. Because the market made two lower lows, but the RSI does not confirm the second one, it is said that the oscillator diverges from price – another bullish case for the pair.

Inflation is much higher in the US

Finally, fundamentals also favor the euro, at least if we look at the inflation differential. Inflation is much higher than the two central banks want, but it runs hotter in the US.

Moreover, most of the rise in the prices of goods and services in Europe was driven by energy prices. The war in Ukraine triggered even higher energy prices.

But in the United States, inflation is spreading everywhere, from food prices to housing. As such, the Fed and the ECB have two different problems on their hands, and the market may simply look at the inflation differential before deciding what currency to buy next.