EUR/USD Forecast: Correction over? Three reasons to expect the pair to dive

No more dead-cat bounces – but the bearish trend is the trader's friend in EUR/USD. The world's most popular currency pair has been setting lower highs and lower lows, and the recent upside correction seems to be nearing an end.

There are three reasons to expect a further downfall.

1) Fading ECB effect: The common currency advanced on Thursday in defiance of broader dollar strength – mostly thanks to the European Central Bank's strategic review announcement. While the Frankfurt-based institution now aims for a symmetric 2% inflation target – not an upper limit at that level – it refrained from taking bolder steps.

Contrary to the Federal Reserve, ECB President Christine Lagarde said it would not price rises compensate for past, soft inflation. Moreover, European policymakers focus on the headline Consumer Price Index rather than less volatile core prices, as the Fed does. 

That special ECB announcement gave a boost to the euro on Thursday, but it is fading away on Friday. Why? The ECB is still buying bonds without an intention to taper it down – contrary to the Fed. More sluggish European growth is set to keep the bank behind its American peer for the foreseeable future. 

See ECB Strategy Change Analysis: Lagarde lags behind dovish Fed, EUR/USD has room to rise

2) Delta and the dollar: COVID-19 is lifting its ugly head once again, spreading fast due to the highly transmissible Delta variant. This strain has landed from Britain and India in both Europe and the US, and is becoming dominant, infecting the still large unvaccinated populations.

In the old continent, it means slower growth and thus a weaker euro. For the US it also means a slower recovery – yet the dollar also functions as a safe-haven currency benefiting in times of trouble. A win-win for bears. 

See Delta Doom is set to storm America, the dollar could emerge as top dog

3) Yields now supporting the greenback: How can the dollar rise while US bond yields are tumbling down? And why are Treasuries receiving so much demand The Delta variant mentioned earlier may provide an answer to the second question – a flight to safety – but the lack of correlation has been perplexing investors.

For others, the greenback's ability to defy gravity was a sign of strength. The tables have turned in bond markets, with yields rising once again. A currency that holds its high ground in times of trouble can shine when things turn in its favor – and that is what is happening now with yields and the dollar. 

All in all, Friday could see EUR/USD resume its falls. 

EUR/USD Technical Analysis

Euro/dollar has failed to recapture the 50 Simple Moving Average on the four-hour chart and continues suffering from downside momentum. Moreover, the recent bounce pushed the Relative Strength Index away from the 30 levels – leaving it far from oversold conditions. 

Some support awaits at 1.1825, the daily low. It is followed only by the new July trough of 1.1781. Further down, 1.1740 and 1.1717 are the next lines to watch. 

Some resistance is at 1.1875, which is the weekly high. It is followed by 1.1895, the monthly high, followed by 1.1950 and 1.1975.