EUR/USD Forecast: Door open to further weakness near term

For the sixth consecutive session, EUR/USD continued to face downward pressure, slipping to levels near 1.0600 and marking new lows for 2024 amidst the ongoing strength of the US Dollar (USD).

This strengthening of the Greenback occurred as investors reconsidered the timing of a potential rate cut by the Federal Reserve (Fed), now anticipated to happen later than previously thought, potentially in December.

This reassessment coincided with a rise in US yields across the yield curve and a more robust narrative regarding the divergence of monetary policy between the Fed and other G10 central banks, notably the European Central Bank (ECB).

Against that backdrop, a surge in the Greenback propelled the USD Index (DXY) to attain fresh year-to-date highs near 106.50, supported by recent higher-than-expected US inflation figures reported in March.

Regarding the ECB, members Rehn and Makhlouf have suggested a possible June rate reduction if inflation trends towards 2%, with a 25-bps cut if the CPI trend persists. Board member Villeroy anticipated further adjustments, while President Lagarde believed the ECB will implement rate cuts soon unless significant unforeseen developments occur.

Around the Fed, at an event hosted at The Wilson Center in Washington, Chair Powell stated that the recent data have not provided them with increased confidence; rather, they suggest that it will likely take more time than anticipated to attain that confidence.

Looking ahead, the relatively subdued economic fundamentals in the eurozone, combined with the resilience of the US economy, reinforce expectations for a stronger Dollar in the medium term, especially considering the prospect of the ECB lowering rates before the Fed. In such a scenario, EUR/USD is expected to undergo a more significant decline from a short-term perspective.

EUR/USD daily chart

EUR/USD short-term technical outlook

The collapse of the 2024 low of 1.0601 (April 16) may place a return to the November 2023 low of 1.0516 (November 1) on the radar before the weekly low of 1.0495 (October 13, 2023), the 2023 bottom of 1.0448 (October 3), and the round milestone of 1.0400.

On the upside, EUR/USD is expected to face early resistance at the important 200-day SMA of 1.0825, followed by the April high of 1.0885 (April 9), the March top of 1.0981 (March 8), and the weekly high of 1.0998 (January 11), all before reaching the psychological barrier of 1.1000. Further gains from here may threaten the December 2023 high of 1.1139 (December 28).

The 4-hour chart reveals that the bearish trend continues for the time being. Against it, the initial support arrives at 1.0601, followed by 1.0516. In the opposite direction, there is an initial up-barrier at 1.0665, ahead of 1.0756 and the 55-SMA at 1.0763. The Moving Average Convergence Divergence (MACD) moved deeper into the negative zone, while the Relative Strength Index (RSI) dropped below 30.