- At the beginning of this week's trading, the bearish trend on the EUR/USD currency pair continued, with losses extending to the support level of 1.0177, the lowest level for the currency pair since October 2022.
- Before stabilizing around the 1.0250 level at the time of writing this analysis.
- The continued selling pressure on the euro dollar may persist until investors and markets react to the announcement of US inflation data this week, which will impact the future of US monetary policy, along with anticipation of Trump's inauguration for a new US term.
Reasons for the decline of the euro against other currencies
According to reliable trading platforms, the euro price has weakened due to several factors, most notably investors reducing expectations for future interest rate cuts by the European Central Bank. This shift reflects growing concerns about persistent inflation, geopolitical instability, and global economic outlook, including the impact of US policies under Trump and the UK's financial crisis.
Additionally, the stronger-than-expected US jobs report recently prompted investors to question whether US interest rates would be cut at all this year. High energy prices have fueled inflation concerns, with crude oil prices exceeding $80 per barrel amid declining Russian exports due to increased US sanctions. European natural gas prices have also risen sharply amid a cold wave and the halt of Russian gas shipments to Ukraine.
Will the euro fall further in the coming days?
Currently, investors are awaiting the release of the minutes of the European Central Bank’s December meeting and the upcoming final inflation data from the eurozone for insights into future monetary policy moves. The euro recently hit a two-year low against the US dollar and further weakness is expected in the coming days, with technical momentum indicators calling for further declines. The euro/dollar exchange rate traded below its main moving averages, making analysts resigned to a possible test of parity in the second half of January.
However, the EUR/USD pair has now reached technical oversold levels with the RSI reading at 30, suggesting a correction within the next couple of days. Overall, the technically oversold nature of the currency makes us believe that a recovery or neutrality is likely in the near term, and this is the main theme we are looking at during this week’s trading. However, the strength will be tepid and a period of neutrality around current levels is all that is needed to allow the oversold levels to be broken.
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Overall, the EUR/USD pair is likely to resume losses after any neutrality, as the weakness is a function of the US dollar’s strength linked to the improvement in US economic strength and rising inflation, which is in contrast to the recession in the Eurozone.
The US dollar exchange rate has been stronger in more than two years
The US dollar exchange rate recently jumped to its highest level in more than two years after it was reported that the US created a total of 256,000 jobs in December, up from 212,000 in November and exceeding estimates by 160,000. In addition to the strong headline figure, the country’s unemployment rate unexpectedly fell to 4.1% from 4.2%, confirming that the US economy is in strong shape heading into the new year. The data had seen financial markets pricing in another rate cut by the Federal Reserve by mid-2025, with only one cut seen so far this year.
Conversely, the European Central Bank is expected to cut rates further, creating a divergence in interest rates that works against the euro and favours the US dollar.
The performance of the US dollar will be influenced by the release of US inflation data on Wednesday, with financial markets expecting inflation to rise from 2.7% to 2.8% year-on-year in December. Financial markets will be particularly interested in the state of core inflation, which is expected to rise by 0.3% month-on-month. Overall, the biggest surprise would be a lower-than-expected reading, which would mitigate the recent rally in the euro and dollar and lead to a profit-taking response that could allow currencies like the euro and the pound to recover. Also, the euro’s gains against the US dollar are likely to be short-lived and limited in scope as the broader trend remains one of dollar dominance, and to challenge this trend will require a major shift in policy.
Trading Tips:
The euro-dollar price is closer to parity, which is a rare, important and exciting event for the forex markets, so be careful and watch carefully what happens next.
EUR/USD Technical Analysis Today:
According to recent trades, the EUR/USD pair has formed lower highs, finding support at the secondary psychological level of 1.0250, creating a descending triangle on the hourly chart. The price is currently testing the bottom of the triangle, and it remains to be seen whether it will bounce back or break down. Overall, a break below the support could lead to a decline equal to the height of the pattern, which is around 200 pips. The 100-day simple moving average is below the 200-day simple moving average, indicating that the stronger path is the downward trend.
However, if buyers return, the EUR/USD pair could recover to the peak of the triangle around the resistance of 1.0350 or dynamic pivot points at the moving averages. However, the Stochastic indicator still has some room to decline before reaching oversold levels, so downward pressure may persist. At the same time, the Relative Strength Index has already started to rise from the oversold area, indicating that buyers are ready to take control.
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