EUR/USD Forecast: Extra weakness not ruled out

The US Dollar (USD) edged modestly higher on turnaround Tuesday, lifting the USD Index (DXY) to the mid-104.00s in spite of a corrective decline in US and German yields.

That said, EUR/USD resumed its downtrend, quickly leaving behind Monday’s small gains and instead exposing further losses well south of the 1.0900 barrier in a context of dominant risk-off sentiment.

Around the Fed, a September interest rate cut appears fully anticipated, with investors also expecting another reduction in December. Against that, market participants could now start shifting their attention to the US political arena, particularly after current Vice President K. Harris gathers more than enough support to face Republican candidate D. Trump at the November 5 elections.

Closer to home, the ECB’s Vice President Luis de Guindos suggested a possible interest rate cut in September, noting that the ECB's new projections would be the "most important" factor in determining whether inflation is returning to target.

Furthermore, the Eurozone's economic recovery prospects and signs of cooling in key US economic indicators may lessen the current monetary policy gap between the Fed and the ECB, occasionally supporting EUR/USD. This view has gained support amid increasing expectations of Fed rate cuts.

Looking ahead, key US GDP figures, advanced PMIs globally, and US PCE data are expected to shape market sentiment in the coming days.

EUR/USD daily chart

EUR/USD short-term technical outlook

EUR/USD is expected to face the next downward stop at the key 200-day SMA of 1.0815 before sliding to its June low of 1.0666 (June 26). The loss of the May low of 1.0649 (May 1) leads to the 2024 bottom of 1.0601 (April 16).

On the other hand, the initial up-barrier emerges at the July top of 1.0948 (July 17), followed by the March peak of 1.0981 (March 8) and the key 1.1000 milestone.

Looking at the larger picture, the constructive bias should remain in play if the pair maintains its position above the critical 200-day SMA.

So far, the four-hour chart shows that the downtrend has picked up pace. That said, the initial resistance is 1.0948, which precedes 1.0981 and 1.1000. On the opposite side, 1.0843 comes first, seconded by the 200-SMA at 1.0793 and lastly 1.0709. The relative strength index (RSI) dropped to about 33.