EUR/USD Forecast: Euro closes in on key support area

• EUR/USD has lost its traction during the European trading hours.
• Data from the euro area reminded markets of the economic slowdown.
• Sellers could take action in case buyers fail to defend 0.9800.

After having climbed to its highest level in two weeks at 0.9900 in the early trading hours of the Asian session on Monday, EUR/USD has reversed its direction and declined toward the 0.9800 area. The risk-averse market environment amid the disappointing PMI data weighs on the shared currency and a drop below 0.9800 could open the door for further losses.

The Wall Street Journal reported on Friday that Fed officials were planning to discuss whether they should communicate a willingness to go for a smaller rate hike in December. This development revived hopes of the US central bank having reached its peak hawkishness and caused the dollar to lose strength against its rivals. 

Although the greenback struggled to find demand at the beginning of the week, the souring market mood helped it hold its ground. As of writing, US stock index futures were down between 0.6% and 0.7%. 

Meanwhile, S&P Global PMI surveys from the eurozone and Germany showed that the private sector business activity in both the manufacturing and service sectors continued to contract at a strengthening pace in early October. 

"The eurozone economy looks set to contract in the fourth quarter given the steepening loss of output and deteriorating demand picture seen in October, adding to speculation that a recession is looking increasingly inevitable," said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence.

In the second half of the day, S&P Global PMI data for the US will be looked upon for fresh impetus. In case safe-haven flows dominate the markets following Wall Street's opening bell, EUR/USD is likely to have a difficult time staging a rebound regardless of how PMI data look.

EUR/USD Technical Analysis 

The Relative Strength Index (RSI) indicator on the four-hour chart holds above 50 despite the latest decline, suggesting that sellers remain hesitant for the time being. On the downside, 0.9800 (Fibonacci 38.2% retracement of the latest downtrend, 20-period SMA, 50-period SMA, 100-period SMA) aligns as key support. With a four-hour close below that level, the pair could come under technical bearish pressure and decline toward 0.9750 (Fibonacci 23.6% retracement) and 0.9700 (psychological level, static level).

On the upside, the 0.9840/50 area, where the Fibonacci 50% retracement and the 200-period SMA are located, forms stiff resistance. If buyers manage to flip that level into support, 0.9900 (daily high, psychological level) and 0.9930 (static level) could be targeted.