EUR/USD Forecast: Further losses appear likely

The continuation of the upward bias in the greenback continued to weigh on the majority of the risk complex at the beginning of the week, particularly sending EUR/USD to the sub-1.0800 region for the first time since mid-December.

Other than USD dynamics, market participants kept digesting the latest ECB event after the central bank matched the broad consensus and left its policy rates unchanged on January 25.

President Lagarde's dovish communication appears to be keeping the price action of the European currency subdued. This comes as she reiterated the European Central Bank's commitment to data dependence and emphasized her earlier remarks on interest rates, including the possibility of a summer cut. It's noteworthy that she highlighted the downside risks to growth and expressed optimism that any wage increases would be adequately absorbed by profits. Lagarde also mentioned a consensus among decision-makers that it is too early to discuss implementing rate cuts.

Still around the ECB, Board member Centeno surprised everybody after favouring interest rate cuts sooner rather than later. In the same hawkish line, he argued that there were no second-round effects coming from higher wages and suggested that the ECB also has to support the region’s economic growth. His comments, despite contrasting with his usual dovish stance, did nothing to help the euro reverse its negative start of the week.

Also keeping the pair under pressure emerges the usual pre-FOMC prudence ahead of its meeting on January 31, where consensus sees the Fed keeping its FFTR unchanged at 5.25%–5.50%. The debate among investors, however, seems to have started to gyrate around the timing of a potential rate cut, as recent prints from key US fundamentals underpinned the view of a resilient economy, therefore motivating the central bank to push back a potential reduction of rates to (most likely) May (from March).

On the latter, and according to CME Group’s FedWatch Tool, the probability of a rate cut in March went down to nearly 48% and just above 50% in May.

EUR/USD daily chart

EUR/USD short-term technical outlook

If the EUR/USD falls further and crosses the 2024 bottom of 1.0795 (January 29), it may then face the temporary 100-day SMA at 1.0776 before reaching the December 2023 low of 1.0723 (December 8). The breach of this level should not get significant support until the weekly low of 1.0495 (October 13, 2023), which precedes the October 2023 low of 1.0448 (October 3) and the round level of 1.0400.

The pair's outlook is predicted to become bearish if it clears the important 200-day SMA (1.0843) in a sustainable fashion.

On the upside, spot needs to leave behind the weekly high of 1.0932 (January 24) to attempt a move to another weekly top at 1.0998 (January 11). Extra gains from here could open the door for a possible visit to the December peak of 1.1139 (December 28).

The 4-hour chart paints a gloomy picture for the pair. South of 1.0795 aligns 1.0723 prior to 1.0656. Bullish attempts, on the other hand, may aim for a challenge of 1.0932 before 1.0998. The MACD remains in the negative zone, and the RSI gradually approaches oversold territory.

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