EUR/USD Forecast: Euro could extend losses if 1.0550 fails

EUR/USD has lost its traction and declined toward 1.0550 early Tuesday after having climbed above 1.0700 on Monday. It's difficult to stop the driver of the pair's recent action as the market improves alongside renewed US Dollar strength. Nevertheless, the technical outlook points to a bearish tilt following the sharp decline witnessed in the European morning.

During the Asian trading hours, risk flows dominated financial markets following the three-day weekend with the Shanghai Composite and Hang Seng indexes both registering strong gains. Although the Euro Stoxx futures opened with a bearish gap and traded deep in negative territory for the majority of the Asian session, Euro Stoxx 50 started the day higher and was last seen rising 0.7% on the day.

In the second half of the day, inflation data from Germany will be looked upon for fresh impetus. On a yearly basis, the Consumer Price Index (CPI) is forecast to decline to 9% in December from 10% in November. 

On Monday, European Central Bank (ECB) policymaker Joachim Nagel told the German trade journal Zeitschrift für das gesamte Kreditwesen that the ECB needs to take further action to curb inflation expectations. An unexpected increase in the annual CPI could remind investors of the ECB's hawkish outlook and help the Euro stay resilient against its rivals.

The US economic docket will feature S&P Global Manufacturing PMI. Since this data will be a revision, it is unlikely to trigger a significant market reaction. 

Risk perception could impact the US Dollar's market valuatin in the second half of the day but the recent irregular market action suggestst that the currency could ifnore the performance of Wall Street's main indexes.

EUR/USD Technical Analysis

The Relative Strength Index (RSI) indicator on the four-hour chart declined to 30 for the first time since early November, reflecting the severity of EUR/USD's latest decline.

The pair could look to stage a technical correction before the next leg lower. In that scenario, 1.0610/1.0620 area, where the Fibonacci 23.6% retracement and the 100-period Simple Moving Averge is located, could act as initial resistance. A four-hour close above that hurdle could attract buyers and open the door for an extended recovery toward 1.0650 (50-period SMA) and 1.0700 (psychological level, end-point of the latest uptrend).

On the downside, 1.0550 (Fibonacci 38.2% retracement) aligns as first support. If EUR/USD drops below that level and starts using it as resistance, 1.0525 (200-period SMA) forms next support before 1.0500 (psychological level, Fibonacci 50% retracement).