EUR/USD Technical Outlook: Short-term Setback

The sharp fall toward the end of last week could be a sign that the Euro’s four-month-long rally is losing steam. EUR/USD dropped after US jobs and services data beat expectations, leading to higher repricing in US rate expectations. Future rates indicate the Fed to hike at least two more rate hikes, taking the benchmark to above 5%.

Before Friday’s data, the market expected the benchmark rate to peak below 5%. This follows a 25 basis points hike by the US Federal Reserve and a 50 basis points hike by the European Central Bank (ECB) last week. While the Fed acknowledged early signs of disinflation, Chairman Powell said the central bank could conduct a few more rate hikes to bring down inflation to its target.

The ECB, on the other hand, maintained its hawkish stance. On balance, while ECB wasn’t incrementally hawkish, the Fed wasn’t as dovish as some had expected, weighing on EUR/USD. On technical charts, EUR/USD had been struggling to extend gains in recent weeks ahead of stiff resistance around 1.0900, including the 89-week moving average and a slightly upward-sloping trend from 2017, as pointed out a couple of weeks ago.

Moreover, a negative momentum divergence on the daily and weekly charts (softening Stochastics as the spot has made new highs) raised the odds of a pause/minor setback in the near term, as highlighted last week. EUR/USD posted a bearish shooting star pattern on the weekly candlestick charts and is now approaching important support at about 1.0700-1.0750.

EUR/USD hasn’t been able to break below the 200-period moving average decisively, suggesting that 1.0700-1.0750 could be tough to break, at least in the first attempt. However, any break below the support would confirm that the upward pressure had faded, indicating the possibility of an extended range in the short term. Subsequent support is at the January low of 1.0480. Strong support is on the 200-day moving average (now at about 1.0320). The uptrend since late 2022 is unlikely to reverse while EUR/USD holds above the long-term moving average.

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