The EUR/USD pair had a difficult year in 2021 as investors reflected on the strong US economic recovery and the stronger dollar. The pair is trading at 1.1373, which is about 8% below the highest level in 2021.
Focus on Fed and ECB
The EUR/USD pair declined in 2021 after the Federal Reserve hinted that it will continue tightening its monetary policy in 2022. In its most recent meeting, the Fed decided to increase the size of its tapering to $30 billion. The hope is that the bank will end its quantitative easing program in March.
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The Fed’s dot plot also showed that the bank will start its rate hike cycle as it battles the rising inflation. As such, analysts expect that the bank will implement three rate hikes, pushing the main rate to about 1% by the end of the year.
Meanwhile, the European Central Bank (ECB) has been a bit neutral in the past few months. While the bank has slowed the pace of asset purchases, it has insisted that it will not hike rates soon.
Therefore, the biggest catalyst for the EUR/USD pair will be the actions by the ECB and the Federal Reserve.
The other key catalysts for the pair will be the trends in the Omicron variant. Recent data shows that the number of cases has jumped sharply in the US and European countries. This week, the US published record number of cases, as the daily increase rose to more than 300k. The same trend is happening in the European Union.
The EUR/USD will also react to the mid-term US elections that will happen in November. Analysts expect that Republicans will win back the House and the Senate, leading to a deadlock in Washington. In addition, key geopolitical events will have an impact on the pair.
EUR/USD forecast
The daily chart shows that the EUR/USD pair has been in a bearish trend in the past 12 months. Recently, however, the pair has formed what looks like a bearish flag pattern and moved below the 25-day and 50-day moving averages. The Relative Strength Index (RSI) has moved from the oversold level of 30 to the current 55.
Therefore, I suspect that the pair will resume the bearish trend as bears target the key support level at 1.1185, which was the lowest level this year.
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Source: https://invezz.com/news/2022/01/01/eur-usd-forecast-bearish-breakout-to-happen-in-2022/