The pressure on the common currency continues as the euro is sold across the FX dashboard. The conflict in Eastern Europe, triggered by Russia’s invasion of Ukraine, weighs on the common currency.
In response to the aggression, European nations reacted with a package of sanctions designed to weaken the Russian economy. But most of these actions have an impact on the European economies too, already weakened by the COVID-19 pandemic.
Yesterday, news broke that Russia is cutting its gas supplies to Poland and Bulgaria. Since then, the EUR/USD dropped below 1.06, to a new five-year low.
Considering that the Federal Reserve of the United States is set to deliver a new rate hike part of its tightening cycle next week, does it make sense to buy the EUR/USD here?
A reversal might be possible
Buying the EUR/USD here is risky. This is a bearish market and while some signs of a reversal do exist, traders would be better off waiting for the market to move first and act second.
One potential bullish reversal is a falling wedge pattern. During such a pattern, the market typically reaches the 1-3 trendline before reversing.
Today’s move is enough to respect this condition, but traders should wait for the price to move above the 2-4 trendline before buying the EUR/USD.
Another potential bullish signal is the possible divergence with the RSI. If the RSI climbs back above oversold territory (i.e., above 30) without making a new lower low, then a bullish divergence may give the green light for a long position.
Fundamentals favor a stronger dollar
In currency trading, it is all about what central banks decide on the monetary policy front.
