EUR/USD Forecast: Correction could extend with a drop below 1.1400

EUR/USD has gone into consolidation following Friday's retreat.
Market action is likely to remain subdued on the MLK Day holiday.
Technical correction could extend in case the pair fails to hold above 1.1400.

Eren Sengezer FXStreet

EUR/USD has lost traction after climbing to its highest level in more than two months at 1.1482 on Friday and erased a small portion of its weekly gains. The pair is trading in a relatively tight range on Monday and the near-term technical outlook doesn't offer any developments that could be taken as a directional clue.

Bond and stock markets in the US will be closed due to the Martin Luther King Jr. Day holiday on Monday and markets are likely to remain quiet.

Rising US Treasury bond yields ahead of the weekend helped the greenback find demand and the US Dollar Index staged a modest rebound. The benchmark 10-year US Treasury bond yield rose nearly 5% on cautious comments from Fed officials on the inflation outlook, registering gains for the fourth straight week.

New York Fed President John Williams said that he was expecting the Omicron wave to temporarily prolong supply chain bottlenecks. On a similar note, San Francisco Fed President Mary Daly argued that Omicron would extend the time period that inflation will remain high. "Slowing the economy a little bit with rate hikes will help bring demand down into better line with supply," Daly added.

With the Fed having gone into the blackout period ahead of next week's FOMC policy meeting, investors could remain on the sidelines while trying to figure out the timing of the Fed's first rate hike and the balance sheet reduction.

EUR/USD Technical Analysis

On the four-hour chart, the Relative Strength Index (RSI) indicator has retreated to 50, mirroring the pair's indecisiveness in the near term. On a bullish note, the ascending trend line coming from January 6 remains intact, suggesting that the latest pullback was a technical correction rather than a reversal.

On the downside, the first support aligns at 1.1400 (ascending trend line, psychological level). In case a four hour candle closes below that level, the correction could extend toward 1.1380 (static level) and 1.1350 (100-period SMA).

Resistances are located at 1.1430 (20-period SMA), 1.1450 (static level) and 1.1480 (two-month high set last week).

Author

Eren Sengezer

FXStreet

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

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