On Tuesday, the dollar dropped sharply as sentiment deteriorated, leading to a decline in both US yields and the US dollar. Ahead of the US session, the EURUSD pair advanced 0.7% and traded near 1.13650.
Earlier in the day, the European CPI inflation rate came out way above expectations of 3.7%, printing 4.9% year-on-year. At the same time, the core inflation rate jumped to 2.6% from 2.0% in October. Nevertheless, the ECB has said several times it is doubtful that it would raise rates in 2022, so inflation can continue to rise toward double digits.
The euro is now trying to get back above the declining trend line, which used to be significant support over the previous months. If bulls are successful and the EURUSD pair jumps above 1.1380, we could see a more substantial rally toward 1.1520.
Additionally, the MACD indicator sent a bullish signal on the daily chart, reinforcing the bullish narrative. It looks like the cycle low below 1.12 will not be revisited for a while.
Furthermore, the euro looks pretty oversold. Therefore risks are skewed toward a short squeeze rally heading into the last trading weeks of the year.
Alternatively, the support is now seen at 1.13, and if broken to the downside, the pair might decline quickly to the swing lows at 1.12. However, as long as the euro trades above 1.13, the short-term outlook appears bullish.
EURUSD daily chart 3 PM CET