EUR/USD at a Crossroads as Critical Support Test Looms Large

• EUR/USD has continued its downtrend following ECB decision
• Technical analysis suggests 1.063 is a crucial support level, with further weakness possible below $1.05
• Long-term outlook and broader economic landscape suggest EUR/USD weakness may continue

The EUR/USD dropped 0.8%, reaching 1.063, following the European Central Bank's decision to raise its policy rate by 25 basis points and its continued pessimistic outlook.

Several factors contribute to the weakening of EUR/USD, including diminishing momentum in the higher highs and lows pattern seen since the start of the year, as well as the interest rate gap between the ECB and the Fed.

The US economy is showing strength with the Consumer Price Index (CPI) and retail sales coming in above expectations. Even though the number of new hirings is decreasing, the absence of increased layoffs is contributing to economic activity.

On the other hand, the European Central Bank (ECB) is lagging behind the US Federal Reserve in tightening monetary policy. The ECB's recent 10th rate hike to 4.5% has led to a decrease in the value of the euro and a decline in bond yields in the Eurozone.

The market had already priced in the Eurozone's stance on fighting inflation, resulting in no significant reaction to the expected interest rate hike. Additionally, concerns over rising energy prices, geopolitical issues, and China's economy may negatively impact the Eurozone.

Historically, September has witnessed the US dollar appreciating against the euro. Thus, seasonality may also contribute to the euro's weakening.

Technical View: EUR/USD

From a technical perspective, EUR/USD extended its nine-week downward streak after breaking a crucial support level of around 1.08 in late August. The pair reached as low as 1.063, attempting to find support at May's lows.

This price level corresponds to Fib 0.382 (1.0633) based on one-year price action, suggesting a significant support point. If EUR/USD closes the week below 1.063, further downward momentum may bring it below $1.05.

Short and medium-term EMA values show a negative crossover on the weekly chart, supporting a seller-biased outlook. However, oversold conditions indicated by technical indicators suggest that Fib 0.382 support might hold.

In summary, 1.063 is a crucial support level for EUR/USD, and a weekly close above this level could trigger euro-favorable reaction purchases.

In such a case, short-term levels to monitor are 1.071, 1.077, and 1.086. Nevertheless, if euro depreciation persists, the range of $1 to $1.02 below the 1.05 support could become the next focal point as the third support zone.

In terms of long-term outlook, EUR/USD has encountered significant resistance after reaching $1.12 this year. The increase observed in 2023 seems to be a cycle that is perfectly recovering from the previous two-year decline.

This is evident from the failure to breach the ideal correction level at Fib 0.618.

To summarize, the long-term outlook and broader economic landscape suggest that EUR/USD weakness may continue until it reaches the third support area.

***

Disclaimer: The author does not own any of these shares. This content, which is prepared for purely educational purposes, cannot be considered as investment advice.