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Euro Forecast: EUR/USD Balance of Risks Tilt Lower as King US Dollar Reigns Supreme

Euro Forecast: EUR/USD Balance of Risks Tilt Lower as King US Dollar Reigns Supreme

Diego Colman, Strategist

EUR/USD OUTLOOK:

  • EUR/USD hits fresh cycle’s low on Tuesday in volatile trading
  • Meanwhile, the U.S. dollar, as measured by the DXY, sets a new multi-decade high, bolstered by better-than-expected U.S. economic data
  • This article looks at technical levels for the euro to keep an eye on over the coming days

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The EUR/USD fell to fresh multi-year lows on Tuesday on sour sentiment, briefly hitting 0.9865 in volatile trading following the reopening of U.S. markets after Monday's Labor Day holiday. While the euro was able to trim some losses during the session, it maintained a slight bearish tone in the early afternoon, hurt by broad-based U.S. dollar strength, with the DXY index surging past the psychological 110.00 level and reaching its best mark since June 2022.

DXY advanced as much as 0.85% at one point, bolstered by a spike in U.S. Treasury rates, which sent both short-term, but especially, long-dated yields sharply higher. The move in bonds was partly fueled by better-than-expected U.S. services sector data. According to the Institute for Supply Management, August non-manufacturing PMI recorded its strongest expansion in four months, climbing to 56.9 versus 55.1 expected - a sign that the economy remains extraordinarily resilient.

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With U.S. economic conditions holding up well even in the face of tighter monetary policy, the central bank is likely to press ahead with its plans to raise interest rates a few more times in the coming months, keeping them in restrictive territory for longer-than-initially envisioned to cool inflation, a bullish outcome for the greenback. Having said that, a dovish pivot will remain elusive for now.

Focusing on the euro side of the equation, the balance of risks is tilted to the downside, chiefly due to the ongoing eurozone energy crisis. The 27-nation club could enter a major recession if it fails to secure sufficient natural gas supplies for the winter following Russia's decision to cut exports to the West via Nord Stream 1. This situation, coupled with record-high natural gas prices in the region, has increased the probability of energy rationing, a scenario that will bias the euro lower and prevent any meaningful recovery from materializing.

EUR/USD Bullish
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily -4% 2% -2%
Weekly -27% 52% -10%
What does it mean for price action?
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EUR/USD TECHNICAL ANALYSIS

After a failed attempt to decisively reclaim parity last week, EUR/USD has resumed its relentless decline, with the exchange rate slightly above 0.9900 at the time of this writing. This area could act as a possible support, but if sellers manage to breach it in daily closing prices, we can’t rule a move towards 0.9670. On the flip side, if buyers resurface and spark a bullish reversal, parity would be a region of interest, followed by 1.0090. On further strength, the focus shifts to channel resistance, slightly below 1.0200.

EUR/USD TECHNICAL CHART

EURUSD technical chart

EUR/USD Chart Prepared Using TradingView

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---Written by Diego Colman, Market Strategist for DailyFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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