EUR/USD eyes further downside as sellers tighten grip

Market overview

On Wednesday, the EUR/USD pair is showing signs of increased selling pressure as the U.S. dollar hovers near its lowest level against a basket of currencies in over a year. This pressure comes amid ongoing speculation about the Federal Reserve's monetary policy moves. The dollar's weakness is partly due to expectations that the Fed will initiate a rate cut at its next meeting, following dovish signals from Fed Chair Jerome Powell last week. Investors are largely betting on a rate cut, with the only debate being whether the reduction will be by 25 or 50 basis points. According to the CME Group's FedWatch Tool, there is now a 36% probability of a larger 50 basis point cut, up from 29% a week ago. Market participants have fully priced in a 25 basis point cut for next month and expect over 100 basis points of cuts by the end of the year.

In contrast, the euro's performance is closely linked to the economic data from the Eurozone, where mixed economic signals have kept the currency in a cautious trading range. Despite recent strength, the euro faces headwinds from potential economic slowdown risks and geopolitical uncertainties, which are influencing market sentiment.

Technical analysis

The EUR/USD pair is currently in a corrective phase after a strong upward trend that began on August 1. On the four-hour chart, the pair has pulled back towards a key trendline support, indicating a potential shift in momentum. The sellers have gained control over the market this Wednesday, with the price breaking below the key support level of 1.11497 after forming a lower high at 1.11901. This break confirms an increase in bearish momentum, suggesting that the pair could move lower in the near term.

The immediate downside target is the 127.2% Fibonacci extension level of the previous upward swing, located at 1.11387. If sellers manage to sustain the break below this level, further declines could extend towards the next support levels at 1.11247 and 1.11093. Meanwhile, the 100-period moving average, positioned at 1.10843, is expected to provide strong support and potentially limit further downside.

Oscillators confirmation

RSI (Relative Strength Index): The RSI is trending lower, moving towards the oversold territory, which indicates growing selling pressure but also suggests that the pair may soon reach a support level where buyers could re-emerge.

MACD (Moving Average Convergence Divergence): The MACD line is below the signal line, reinforcing the bearish outlook, although both lines are currently in a neutral position, indicating mixed momentum.

Moving averages: The moving averages are mixed, with the 34-period moving average showing a downward slope, supporting the bearish trend, while the 100-period moving average is providing potential support at lower levels.

Alternative scenario: Should buyers regain control and push the price above the 34-period moving average, the EUR/USD pair could encounter resistance at 1.11651. A break above this level would aim for the recent high at 1.11901. If this resistance is broken, it would signal a potential resumption of the previous uptrend, possibly leading to a test of higher levels in the coming days.

Key levels

Resistance levels:

• Resistance 3: 1.11901.
• Resistance 2: 1.11651.
• Resistance 1: 1.11497.

Current price (at the time of analysis): 1.11432.

Support levels:

• Support 1: 1.11387.
• Support 2: 1.11247.
• Support 3: 1.11093.
• Support 4: 1.10843.

Key events to watch

Several key economic events could significantly influence the EUR/USD pair's direction later this week:

1. US Gross Domestic Product (GDP) Q2 preliminary estimate: The preliminary estimate of GDP for the second quarter of 2024 will provide insights into the economic growth of the United States. Stronger-than-expected growth could alter market expectations regarding the Fed's rate cut path, potentially supporting the dollar.

2. US Core Personal Consumption Expenditures (PCE) Index: As the Fed's preferred inflation gauge, the core PCE data could impact market sentiment regarding future rate cuts. However, given the recent shift in focus from inflation to economic strength, the PCE's impact may be limited unless it shows a significant deviation from expectations.

3. Eurozone economic data: Investors will be closely monitoring Eurozone economic indicators, including consumer confidence and business sentiment, to gauge the region's economic health and its potential impact on the euro.

Conclusion

The EUR/USD pair is currently under pressure as sellers dominate the market, pushing the pair towards key support levels. Technical indicators confirm a bearish outlook, with further downside potential if support levels are breached. However, upcoming economic data releases, particularly from the United States, could shift market dynamics. Traders should closely watch key levels and be prepared for potential volatility, especially around significant economic announcements. The overall bias remains bearish unless the pair breaks above critical resistance levels, which could signal a change in trend.