EUR/USD Daily Forecast – Critical Resistance Fails to Block Recovery

Last Week’s Drop: Break or Fake?

EUR/USD dipped to fresh two-year lows last week on the back of broad-based dollar strength and a more dovish than expected Fed meeting. The pair has since recovered losses from the prior week and has climbed above an important level.

A horizontal level at 1.1118 had held EUR/USD higher in April and in May. Last week, the pair broke below it to signal a breakdown. However, the exchange rate saw some strong buying late in the week, and after extending gains in early trading today, it has rallied back above the level.

This seems to suggest last week’s decline was a fake break below support which is likely to accompany some position squaring from bears, at least in the early week.

Recent gains in EUR/USD are partially attributed to dollar weakness. The reason I say partially is that the commodity currencies remain in the red versus the dollar for the month thus far. In fact, AUD/USD is on the verge of breaking to a 10-year low.

Markets Once Again Looking for More Easing

Last week’s turn in EUR/USD came after US President Trump announced more Tariff’s on Chinese goods. This triggered a drastic repricing of US interest rate expectations. Interestingly enough, this happened just after the markets had parred back bets for another cut in September as the Fed decision was perceived to be more dovish than expected.

The CME Fedwatch tool indicates a rate cut in September is fully priced in. Not only that, also baked in is a roughly one in four chance of a 50 basis point cut. This seems all too familiar, but perhaps Trump’s tariff announcement might just change the tune of the Fed at the next meeting.

It has been difficult to keep up with the fundamental shifts in EUR/USD. The perception of who will ease more between the ECB and Fed has shifted rapidly, sometimes even daily. However, while there may not be a clear answer on the fundamental side of things, the technical outlook appears to be quite explicit.

Technical Analysis

As mentioned, an important level at 1.1118 is in play. The rally above it has invalidated the prior downside break. For that reason, I expect that early week dips will be held by the level.

To the upside, there is a horizontal level at 1.1188 which has been respected as both support and resistance. This level stands to cap near-term gains. If we do see a sustained rally over the next day or two, the next area to watch is around 1.1230 as both the 50 and 100-day moving averages have converged toward the level.

Bottom Line

• EUR/USD has invalidated a previous technical breakdown. Dips towards support at 1.1118 are likely to be bought.
• Upside resistance in the early week is found at 1.1188. Beyond that, the 50 and 100-day moving averages create a resistance confluence around 1.1230.