EUR/USD Forecast: Clinging to critical support after major Mid-East escalation, ahead of data

It has finally happened and could have significant consequences – a major escalation between the US and Iran. EUR/USD has dropped as part of the broader safe-haven reaction. 

President Donald Trump ordered the killing of Qassem Suleimani, the commander of Iran's Quds forces and seen by many as responsible for spreading the Islamic Revolution beyond the borders of Iran. 

The general – considered by some as No. 2 in the regime after supreme leader Ali Khamenei – was shot down by missiles sent from drones in Baghdad's airport. The dramatic deterioration in US-Iranian relations followed weeks of clashes in Iraq. Militias backed by Tehran killed an American contractor, leading to American strikes against the alleged suspects, which in turn were followed by protesters storming the US embassy in Baghdad's "Green Zone."

The market response was swift. Oil prices shot higher, and safe-haven assets such as gold, the yen, and the dollar were seized upon. The moves are exacerbated by thin liquidity following the New Year's holiday as those investors that are at their desks are not waiting for Tehran's response. 

Outside the Middle East

The greenback had already been gaining ground before the news broke – reversing the end-of-year flows in the dying hours of 2019 that saw a sell-off of the American currency. 

Apart from further responses to the strike, EUR/USD is set to react to significant data releases on both sides fo the Atlantic. The preliminary Consumer Price Index in France beat expectations with an increase of 0.4% against 0.3% expected. German states are publishing their estimates for December throughout the morning, and the all-German statistics are scheduled for 13:00 GMT.

The focus will then shift to the US. ISM's Purchasing Managers' Index for the manufacturing sector is projected to advance but remain below the 50-point threshold separating expansion from contraction. 

See US ISM manufacturing PMI December Preview: Waiting for improvement from China trade

Late in the day, the Federal Reserve releases its meeting minutes from the December meeting in which it decided to cut interest rates but signal a long pause. Nevertheless, Jerome Powell, Chairman of the Federal Reserve, set a higher bar for raising rates than for cutting them. The document may shed more light on the bank's intentions.

See December FOMC minutes preview: Affirming neutral

Overall, significant data releases will probably have a hard time competing with the news out of the Baghdad, and potentially additional developments. 

EUR/USD Technical Analysis

Euro/dollar has dropped below the 50 Simple Moving Average on the four-hour chart – a bearish sign. Moreover, momentum has turned negative.

The currency pair is holding above 1.1150, which capped the pair in early September and was also a swing high afterward. Moreover, it nearly converges with the 200 SMA.

Further down, 1.1130 and 1.1110 also held EUR/USD down during December. They are followed by 1.1065, which provided support around Christmas. 

Looking up, 1.1175 was a swing high in mid-December. It is followed by 1.12,  a round number that provided support in the dying days of 2019. Next, we find 1.1220 and 1.1240, which capped it around the same time.