EUR/USD: our forecast after 3 months of lateral trading

EUR/USD is back at 1.13, an area where it has been consolidating for three months already. Will the 2022 lows hold or will we see a continuation of the main downtrend?

This year began with the US dollar rallying on the charts. It literally gained against all its G10 peers, and especially against the EUR.

The strength of the greenback led the EUR/USD to fall below 1.12, where buyers emerged. From a technical perspective, the pair could form an inverted head and shoulders pattern. While the technical picture is fairly simple, the fundamental pattern is more complicated, and is likely to determine the future trajectory of the exchange rate.

The inverted head and shoulders pattern shows 1.18
From a technical analysis perspective, EUR/USD is "working" on the right shoulder of an inverted head and shoulders pattern. The move below 1.12 represents the head of the pattern, and the neckline is seen just above 1.14.

Such a pattern is more powerful the more similar the two shoulders are. As such, further consolidation between the 1.13 and 1.14 levels could be bullish for EUR/USD in the medium term, provided the recent low holds.

A close above the neckline would trigger more upside as the bulls try their hand at measured movement. Measured movement is calculated as the distance from the head to the neck projected from the neck. It points to 1.18 and represents the minimum distance the market should move.

Monetary policy and geopolitics - key drivers of the EUR/USD exchange rate
Fundamental analysis looks more interesting than technical analysis. On this front, the EUR/USD would likely be influenced by geopolitical and monetary policy developments.

Both central banks are preparing for monetary tightening
The US Federal Reserve and the European Central Bank have warned investors that the time for monetary tightening has arrived. However, the Fed is expected to tighten faster and more aggressively than its European counterpart, which is bullish for the greenback and bearish for the EUR/USD.

Developments between Russia and Ukraine pose a risk to EUR/USD bulls
All eyes are on Russia these days. The conflict in Ukraine is likely to escalate and investors may seek safety in the world's reserve currency - the US dollar. Moreover, a conflict on the periphery of Europe would weigh on the common currency.