The path of least resistance is lower
Technical signals remain bearish for the euro
The euro suffered significant losses against the US dollar in 2021. Although trading was volatile and largely directionless for the first five months of the year, the decline was relentless from June. The exchange rate fell from ~ 1.2250 to ~ 1.1200 as the ECB remained relatively accommodating and the Fed took the first important steps towards normalizing its policy. Meanwhile, EUR / USD broke decisively below its 50-day, 100-day and 200-day moving average, setting highs and lows impeccably, a bearish sign according to technical analysis.
The daily chart below shows that the euro’s pullback was guided by a flawless downtrend line extended from the May high. This line has been tested several times, pushing back rally attempts and constantly pushing the price down. In the near term, this trendline should continue to act as strong dynamic resistance.
For the first quarter of 2022, technical signals remain extremely negative for the common currency, so a significant rebound seems a distant prospect. As such, the path with the fewest obstacles continues to be downward, but for the bearish momentum to accelerate and catalyze the next lower step, the recent consolidation must end and lead to a decisive move. below the 1.1200 / 1.1160 support area. If the exchange rate falls below that low, sellers could embolden themselves to drive the pair towards the psychological level of 1.1000, an area that has not been tested since May 2020.
In the event of a bullish reversal, EUR / USD needs to overcome many hurdles before the technical situation begins to improve, with the first barrier at 1.1370 / 1.1385. If the bulls reassert themselves and manage to propel the price above that high, trendline resistance near 1.1500 would concentrate, followed by 1.1690, October’s high. Either way, for a long-term uptrend to develop, the EUR / USD must break above its 200-day moving average, a far-fetched scenario at this point.
Fundamentally, there is reason to believe that the US dollar may outperform the euro in the coming months. A clear positive wind for the greenback is the divergence in monetary policy between the Federal Reserve and the European Central Bank. For example, as the Fed prepares to hike interest rates three times in 2022 to counter inflationary pressures, the ECB is unlikely to increase borrowing costs in the coming year. For a more complete fundamental analysis, however, please refer to the first part of this guide.
EUR / USD DAILY CHART
Chart created using TradingView