EUR/USD – Profit booking to trigger short-term rebound, potential for upside in the coming days

The EURUSD exchange rate has experienced a continued decline over the past four months, reaching a 52-week low on Monday, with prices trading within the 1.0178 range during the European session. The primary drivers behind this bearish trend can be attributed to several key economic factors

Strengthening US Dollar

The US dollar has been buoyed by robust labor market data and growing expectations that inflationary pressures may persist, especially in the context of political developments such as a potential Trump administration. This is compounded by weak economic data from both the Eurozone and China, which has further supported the dollar and contributed to the bearish momentum in EURUSD.

Rising US bond yields

The upward trajectory of US bond yields continues to attract capital flows into the US dollar. As bond yields increase, investors are incentivized to seek higher returns from US government debt, which provides a stronger alternative to risk-sensitive assets like the euro, placing downward pressure on the EURUSD exchange rate.

Global bond yield dynamics and inflationary pressures

Bond yields are rising globally, driven by resilient US economic data and persistent inflationary pressures. This environment makes fixed income investments more appealing, as they offer attractive returns compared to riskier assets. In particular, the euro is sensitive to these global yield movements, further reinforcing the bearish outlook for EURUSD.

Looking ahead, market participants will closely monitor the release of the US Consumer Price Index (CPI) data on Wednesday, which could offer additional insight into inflation trends and influence the trajectory of the USD and EURUSD exchange rate.

There are several factors that could support my view

Profit booking in EURUSD could occur now, leading to prices moving upwards in the next few days.

Short-term retracement

After a prolonged bearish trend, it is common for traders to take profits on short positions, especially if the market is perceived to be oversold or nearing key support levels. This could trigger a short term bounce in EURUSD as traders adjust their positions.

US Dollar weakening

If US economic data (such as the CPI released on Wednesday) disappoints, or if inflationary pressures ease, the US dollar might weaken. A more dovish Federal Reserve or a shift in market expectations regarding future interest rate hikes could lead to a decline in the US dollar, boosting EURUSD in the short term.

Eurozone data improvement

Any positive economic surprises from the Eurozone, such as stronger than expected GDP growth or an uptick in inflation, could lead to a strengthening of the euro. If the European Central Bank signals a more hawkish stance or indicates that it is prepared to act to combat inflation, it would further support EURUSD.

Positioning

If positioning in the market is heavily skewed towards short EURUSD, a short squeeze (where traders are forced to cover their positions) could trigger a sharp upward move in the pair.

EUR/USD reached a low of 1.0178 during Mondays European session, which could present a potential buying opportunity. This level may signal a possible trend reversal, with profit-taking potentially driving a short-term rebound in the pair.

If EUR/USD prices rise, they may test Fridays high at the 1.0312 level. A break above this resistance could lead to a move toward the 20-day moving average at 1.0353, which would serve as a key resistance zone. If the pair surpasses this level, it could extend gains towards the monthly high at 1.0438.

In conclusion

EUR/USD may be at a turning point, with the potential for a shortterm rebound following profittaking. If the pair moves higher, key resistance levels at 1.0312, 1.0353, and 1.0438 will be important to watch. A break above these levels could signal further upside, while failure to sustain upward momentum may lead to renewed downside pressure.