EUR/USD Price Forecast: Further selling could be down the road

EUR/USD comes under fresh selling pressure as the pair cooled off from overbought levels, helped along by a modest recovery in the US Dollar (USD). Even so, the broader tone for the single currency remains constructive at the start of the year.

Price action was choppy on Thursday. After topping out near the 1.2100 area on Wednesday, levels last seen back in the summer of 2021, the pair slipped lower before finding some footing later in the North American session. A mild pullback in the US Dollar allowed EUR/USD to claw its way back towards the 1.1960 area by the close.

On the USD side, the US Dollar Index (DXY) lost some steam as the session progressed, fading an earlier attempt higher and slipping slightly into negative territory around the low-96.00s.

Fed message: steady hands, no rush

The Federal Reserve (Fed) kept the Fed Funds Target Range (FFTR) unchanged at 3.50%–3.75% at its January meeting, exactly as markets had expected.

Policymakers struck a slightly more confident tone on growth, noting that economic activity continues to expand at a solid pace. Inflation was still described as somewhat elevated, and uncertainty around the outlook remains high, but importantly the Federal Open Market Committee (FOMC) no longer sees downside risks to employment as increasing. The decision passed by a 10–2 vote, with Miran and Waller dissenting in favour of a 25 basis points rate cut.

Speaking at the press conference, Chair Jerome Powell reiterated that the US economy remains on firm footing and that the current policy stance is appropriate. He pointed to signs of labour market stabilisation, with softer job growth reflecting weaker labour demand and slower labour force growth. On inflation, Powell stressed that much of the recent overshoot is being driven by tariff-related goods prices rather than underlying demand, while services disinflation continues. He also noted that tariff effects are likely to peak around mid-year.

Powell emphasised that policy decisions will remain meeting by meeting, with no preset path. Crucially, he underlined that no one on the Committee sees a rate hike as the base case, adding that risks on both sides of the mandate have eased somewhat.

Adding another layer of uncertainty, President Trump signalled that a decision on a nominee for the next Fed Chair could come soon, keeping attention firmly on the central bank beyond this week’s meeting.

ECB: patient, but not asleep at the wheel

The European Central Bank (ECB) also stayed on hold at its December 18 meeting, adopting a calmer and more patient tone that has pushed expectations for near-term rate cuts further out. Small upgrades to growth and inflation forecasts helped reinforce that stance.

According to the ECB Accounts published last week, policymakers made it clear there is no urgency to change course. With inflation close to target, they have room to remain patient, even as lingering risks mean flexibility remains essential.

Members of the Governing Council (GC) were keen to stress that patience should not be confused with complacency. Policy is seen as being in a “good place” for now, but not on autopilot. Markets appear to have taken that message on board, pricing in just over 4 basis points of easing over the year ahead.

Positioning: still supportive, but enthusiasm fading

Speculative positioning continues to favour the euro, though signs of fading conviction are beginning to show.

Commodity Futures Trading Commission (CFTC) data for the week ending January 20 show non-commercial net long positions slipping to seven-week lows around 111.7K contracts. At the same time, institutional players trimmed short exposure, now sitting near 155.6K contracts.

Open interest also fell to roughly 881K contracts, snapping a three-week run of increases and hinting that participation, and confidence, may be thinning.

What could shape the next leg

Near term: The spotlight is likely to remain firmly on the US Dollar as markets refocus on upcoming US data in the wake of the Federal Open Market Committee meeting. On the Euro (EUR) side, Germany’s flash inflation figures and early Gross Domestic Product (GDP) estimates will be watched closely for fresh direction.

Risks: A more cautious-for-longer Fed could quickly tilt momentum back in favour of the US Dollar. From a technical standpoint, a clean break below the 200-day Simple Moving Average (SMA) would also raise the risk of a deeper and more sustained correction.

Tech corner

The loss of momentum in EUR/USD appears only temporary. As long as the pair stays above its key 200-day SMA at around 1.1600, it should keep going up.

The return of the bullish stance should put pressure on the 2026 ceiling at 1.2082 (January 28). After this level is broken, the pair may turn its attention to the May 2021 peak at 1.2266 (May 25) and then the 2021 high at 1.2349 (January 6).

In the meantime, bears are up against their first line of defence in the 1.1690–1.1670 range, where the temporary 55-day and 100-day SMAs are. The key 200-day SMA is at 1.1600 below this point. If the price breaks below this level, it could go down to the November 2025 base at 1.1468 (November 5) before going up to the August floor at 1.1391 (August 1).

Also, momentum indicators show that there could be more gains in the near term. That being said, the Relative Strength Index (RSI) is around 67, and the Average Directional Index (ADX) is close to 32, which shows a strong trend.

Bottom line

For now, EUR/USD is being driven far more by developments in the US than by anything coming out of the euro area.

Until the Fed offers clearer guidance on its 2026 rate path, or the eurozone delivers a more convincing cyclical upswing, any upside is likely to unfold gradually rather than turn into a clean, decisive breakout.