The EUR/USD spot price held steady on Tuesday morning as the US dollar index (DXY) and the VIX rose. It was trading at 1.0500, which was about 10% above the lowest level this month. It was hovering near its highest level since June this year.
US dollar and VIX index rallies
The EUR/USD pair declined slightly as the US dollar staged a strong comeback. The DXY index, which tracks the performance of the US dollar, rose to a high of $105 after the US published a series of strong economic data. For example, on Friday, data revealed that the unemployment rate remained at a historic low of 3.7% as the economy added over 285k jobs.
Therefore, according to the WSJ, the Fed will likely continue hiking interest rates in 2023. The report estimated that the bank will hike rates by 0.50% in its December meeting followed by several increases in 2023. As such, these rate hikes will likely push the terminal interest rates to above 5%. If this happens, rates will likely soar to the highest point since 2007.
The main challenge for the Fed is that the US yield curve has inverted to the lowest level in years. As such, while the labor market is strong, the yield curve inversion signals to a potential recession. Extremely high-interest rates will speed this meltdown.
On the positive side, the prices of key inflation drivers have dropped recently. Gasoline price is approaching its lowest level in more than a year. Natural gas prices have also continued pulling back in the past few weeks. Most importantly, many retailers have increased their discounts.
EUR/USD forecast
The daily chart shows that the EUR/USD price has been in a bullish trend in the past few weeks. As it rose, the pair moved above the 200-day and 50-day moving averages. The two averages are about to have a golden cross. At the same time, the Relative Strength Index (RSI) has continued rising and is nearing the overbought level.
Therefore, the pair will likely continue rising as buyers target the important resistance at 1.0788, the highest point on May 30. The stop-loss for this trade will be at 1.0360.
