EUR/USD Forecast: Euro finally surrenders to dollar strength, why more may be in store

Prices are a pain in Spain – but higher prices in the eurozone have failed to lift EUR/USD. On the contrary, the break to the lowest since November 2020 has begun only afterward. If a currency pair is unable to rise on positive developments, it is bound to fall. There are additional reasons to expect a deeper dive.

Massive dollar strength is behind the recent moves. The Federal Reserve's tapering signal one week ago triggered a sell-off in bonds. The resulting higher yields make the dollar more attractive and take the shine off stocks, which suffered their own significant decline. In turn, the downbeat market mood pushes investors to the safety of the dollar. A virtuous cycle for King Dollar.

The greenback's ascent only took a short breather as 10-year yields slipped from the 1.56% peak to 1.50%. EUR/USD only experienced a "dead-cat bounce" – en route to a new fall. The currency pair failed to benefit from higher Spanish inflation and from a drop in US yields – and is set to suffer on the next downward move.

The safe-haven dollar also continues benefiting from several troubling issues. US Treasury Secretary Janet Yellen told Congress that America her department's extraordinary measures to prevent hitting the debt limit would be exhausted by October 18 – resulting in default and perhaps a financial crisis. In the past, lawmakers averted such a calamity and the US always paid its debt. However, as the clock ticks, markets worry.

Circling back to the pain in Spain, gas prices are surging all over the old continent and threaten to derail the recovery. While Europe's issue could be related to a desire by Russia's Gazprom to begin using the controversial NordStream 2 pipeline, energy problems are more widespread. 

China continues grappling with power outages that are disrupting the industry in the northeast. Delays in production could hobble global growth. Authorities in Beijing are taking steps to mitigate the problem, but fears are unlikely to subside soon. 

Later in the day, Powell will speak alongside European Central Bank President Christine Lagarde in a panel including other central bankers. While both have been speaking in recent days, the event could serve as a reminder that the Fed is more hawkish than the ECB, which seems to continue shrugging off inflation. 

Overall, there is room for more dollar strength. 

EUR/USD Technical Analysis

Apart from dipping to the lowest levels since November 2020, EUR/USD is also suffering from downside momentum on the four-hour chart and trades well below the 50, 100 and 200 Simple Moving Averages. The Relative Strength Index is above 30, thus outside oversold conditions. 

Immediate support is at 1.1656, the daily low. It is followed by the all-important double-bottom of 1.1610 recorded last year. The next level to watch is 1.1550.

Some resistance is at 1.1680, which was a swing low last week. The 1.17, 1.1725 and 1.1755 levels are next.