EUR/USD Forecast: Eyeing a breakdown to two-year lows and dreading Draghi

Darker clouds await European Central Bank President Mario Draghi – which may announce a rate cut – for the first time since 2016. The worsening inflation outlook, concerns about past growth – and most lately growth prospects, all led the ECB to signal upcoming stimulus.

The most recent downbeat indicator came from Germany's IFO thinktank. It's Business Climate gauge dropped to 95.7 points, below expectations and the worst since 2013. The broad forward-looking survey's depressing result joins weak purchasing managers' indicators published on Wednesday.

These fresh figures have pushed EUR/USD to lower ground amid expectations that the Frankfurt-based institution may act already today by reducing the deposit rate from -0.40% to -0.50%. However, uncertainty is high and some expect the ECB to wait until its staff publishes new forecasts in its September meeting. Draghi and his colleagues at the Governing Council may also consider restarting the Quantitative Easing program – buying bonds and printing new money.

For the scenarios and probabilities, see the ECB Preview: Sell the rumor, buy EUR/USD? – Five scenarios for Draghi's critical event

On the other side of the Atlantic, US New Home Sales fell short of expectations with 646K annualized. Markit's US PMIs were mixed. The greenback faces a more substantial test today with the publication of Durable Goods Orders for June – critical input for Friday's initial GDP release. 

See US Durable Goods Orders Preview: Positive omens

Overall, Draghi's actions and words are set to determine EUR/USD's direction.

EUR/USD Technical Analysis

The Relative Strength Index on the four-hour chart is below 30 – indicating oversold conditions – and implying a temporary bounce. However, downside momentum prevails and the pair is trading below the 50, 100, and 200 Simple Moving Averages. 

The daily low of 1.1122 is the immediate line of support and the last defense before the 2019 low of 1.1107. Further down, we are back to levels seen in 2017 – 1.1025 and 1.0900.

Initial resistance awaits at 1.1155 which capped EUR/USD earlier this week. It is followed by 1.1180 and 1.1195 which formed the broken uptrend support line. Next up, we find 1.1245 and 1.1290.