EUR/USD Analysis: Languishes near monthly low, bearish potential seems intact

The EUR/USD pair oscillates in a narrow range through the early European session on Friday and remains within the striking distance of over a one-month trough touched on Wednesday. The European Central Bank (ECB) policymakers have struggled to send a clear message if they will raise interest rates or lower them, which is holding back traders from placing directional bets around the shared currency. In fact, Bundesbank President Joachim Nagel said on Monday that it is too early for the ECB to discuss cutting interest rates as inflation remains high. In contrast, ECB Governing Council Member Tuomas Valimaki on Tuesday signalled his openness to consider lowering interest rates sooner than most of his colleagues.

Furthermore, ECB President Christine Lagarde declined to push back against bets for a cumulative of over 150 basis points (bps) rate cuts this year. Lagarde, however, cautioned against premature optimism in markets amid a rise in the Eurozone inflation, to the 2.9% YoY rate in December. Apart from this, subdued US Dollar (USD) price action failed to provide any meaningful impetus to the EUR/USD pair on the last day of the week. The better-than-expected US Retail Sales data released on Wednesday, along with Thursday's robust labor-market report, suggested that the economy is in good shape. Moreover, the recent hawkish remarks by several Fed officials tempered expectations for an early interest rate cut.

Meanwhile, diminishing odds for a more aggressive policy easing by the US central bank lift the yield on the benchmark 10-year US government bond to its highest in over five weeks and lend some support to the buck. That said, the markets are still pricing in a 50% chance of a Fed rate cut in March. This, along with a stable performance around the equity markets, caps the upside for the safe-haven Greenback and lends some support to the EUR/USD pair. Hence, it will be prudent to wait for a sustained move in either direction before determining the near-term trajectory for the currency pair. Market participants now look forward to ECB President Christine Lagarde's comments at the World Economic Forum for some impetus.

Later during the early North American session, traders will take cues from the US economic docket – featuring the release of the Preliminary Michigan Consumer Sentiment and Inflation Expectations, along with Existing Home Sales data. Apart from this, speeches by influential FOMC members, along with the US bond yields and the broader risk sentiment, could drive the USD demand and produce short-term trading opportunities around the EUR/USD pair. Nevertheless, spot prices remain on track to register weekly losses in the wake of the underlying bullish tone surrounding the USD.

Technical Outlook

From a technical perspective, this week's breakdown below the 61.8% Fibonacci retracement level of the December move-up favours bearish traders. Moreover, oscillators on the daily chart have just started gaining negative traction and suggest that the path of least resistance for the EUR/USD pair is to the downside. That said, a convincing break below the very important 200-day Simple Moving Average (SMA), currently pegged near the 1.0845 region, is needed to reaffirm the negative outlook. Spot prices might then accelerate the fall further towards the 100-day SMA, around the 1.0765 region, before aiming to challenge the December swing low, near the 1.0725-1.0720 area. This is closely followed by the 1.0700 mark, which if broken decisively should pave the way for an extension of the recent corrective decline from a multi-month peak touched in December.

On the flip side, the 1.0900 mark might continue to act as an immediate barrier ahead of the 1.0920 horizontal zone, representing a nearly two-week-old trading range support breakpoint. Any further recovery is more likely to attract fresh sellers and remain capped near the 1.0970-1.0975 supply zone. The latter should act as a key pivotal point, which if cleared decisively might trigger a short-covering rally. The subsequent move-up has the potential to lift the EUR/USD pair beyond the 1.1000 psychological mark, towards the next relevant hurdle near the 1.1060 area. The momentum could extend further towards the 1.1100 mark en route to the multi-month peak, around the 1.1135-1.1140 region.

EUR/USD daily chart