The EUR/USD exchange rate could be on cusp of a strong bullish breakout to the important resistance at 1.200 amid a potential divergence between the Federal Reserve and the European Central Bank (ECB). It was trading at 1.1700 today, up by 15% from its lowest point this year.

ECB and Federal Reserve divergence

There are signs that the ECB and the Federal Reserve will move in divergent paths in the coming months. 

Most economists expect that the ECB will maintain interest rates steady in its meeting on Thursday since inflation has moved to its target of 2.0%. 

The most recent preliminary data showed that the annual inflation in the bloc stood at 2.1% in August, while core CPI, which excludes the volatile food and energy prices, rose to 3.1%.

The bloc’s inflation may remain in this range for a while or even drop further because of the stronger euro and the falling energy prices. 

Data show that the Brent crude oil price has dropped to $67, down by over 18% from its highest point this year. It has fallen because of the ongoing OPEC+ increases.

The ECB will maintain low interest rates as it works to boost the bloc’s economic growth at a time when it is facing major challenges. For example, the bloc’s top companies are now paying higher tariff rates whenever they ship their products to the United States.

Additionally, France has remained in a perpetual political crisis that saw the previous prime minister lose his job. 

Federal Reserve interest rate cuts 

The Federal Reserve, on the other hand, is expected to start cutting interest rates next week. Most analysts see the cut being 0.25%, but some analysts see it being bigger. In a note, Ing analysts said:

“The Fed’s own Beige Book made for grim reading earlier this week and that was the catalyst for a 50bp move last year to kick things off in terms of Fed rate cuts. However, the conservative make-up of the Fed (for now) and uncertainty over tariffs on inflation means there probably won’t be a majority, but we could see two or three voting for 50bp.”

Donald Trump has said that he would prefer a mega rate cut, including a 300 basis points one. In a Truth Social post on Tuesday, he said that the bank should slash rates by 100 basis points.

The Fed is now living in its nightmare scenario, where the unemployment rate and inflation are rising. A report released last week showed that the unemployment rate rose to 4.3% in August as the economy added 22,000 jobs.

Another report this week showed that the number of Americans on payroll was much smaller than expected. A preliminary report by the Bureau of Labor Statistics lowered the number by 911,000, the biggest downward revision in years.

The next important catalyst for the EUR/USD pair will be the upcoming US consumer inflation data on Thursday. Economists see the report showing that the headline Consumer Price Index (CPI) rose to 2.9%, while the core CPI moved to 3.3%.

The EUR/USD exchange rate will likely continue rising as odds of more Fed and ECB divergence rise.

EUR/USD technical analysis 

EUR/USD chart | Source: TradingView

The weekly chart shows that the EUR/USD exchange rate has rebounded in the past few months, moving from a low of 1.0170 in January to a high of 1.1830 on June 23rd.

It formed a golden cross pattern in June as the 50-week and 200-week Exponential Moving Averages (EMA) crossed each other. This cross often leads to more gains over time.

The pair has formed a bullish pennant pattern, which is characterized by a long vertical line and a symmetrical triangle.

Therefore, the pair will likely have a strong bullish breakout in the coming weeks as the two lines of the triangle are nearing their confluence levels. A bullish breakout will push it to the psychological level at 1.2000.

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