EUR/USD Forecast: Next line of defence aligns at 0.9750

Following Thursday's unconvincing recovery attempt, EUR/USD has turned south and dropped to its weakest level in two decades below 0.9800. The pair closes in on 0.9750, which aligns as the next line of defence, and the risk-averse market environment suggests that the shared currency is likely to stay on the backfoot.

Earlier in the day, the data from the euro area revived concerns over a deep recession and forced the euro to deal with additional selling pressure. S&P Global's Composite PMI for Germany declined to 45.9 from 46.9 in August and dropped to 48.2 from 48.9 for the eurozone, revealing that the economic activity in the private sector continued to contract at a strengthening pace. 

Commenting on the PMI surveys, "a eurozone recession is on the cards as companies report worsening business conditions and intensifying price pressures linked to soaring energy costs," said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence. "The challenge facing policymakers of taming inflation while avoiding a hard landing for the economy is therefore becoming increasingly difficult.”

In the second half of the day, S&P will release the preliminary PMI figures for the US as well. A recovery in the service sector's activity could help the dollar continue to outperform its rivals ahead of the weekend. Meanwhile, US stock index futures are losing between 0.5% and 0.7%, suggesting that safe-haven flows are likely to dominate the financial markets during the American trading hours.

It's worth mentioning, however, profit-taking toward the end of the European session could ramp up the volatility and help the shared currency limit its losses in the short term.

EUR/USD Technical Analysis

EUR/USD is trading within a touching distance of 0.9750 (static level). With a four-hour close below that level, additional losses toward 0.9700 and 0.9660 (August 2002 low) could be witnessed.

On the four-hour chart, the Relative Strength Index (RSI) indicator stays well below 30, suggesting that the pair could make a technical correction before the next leg lower. In that case, 0.9800 (static level, former support) could be seen as first hurdle before 0.9880 (static level, 20-period SMA) and 0.9900 (psychological level).