Technical signals remain bearish for the Euro
The Euro suffered significant losses against the U.S. dollar in 2021. Although trading was wobbly and largely directionless for the first five months of the year, the journey lower was relentless from June onwards. The exchange rate fell from ~1.2250 to the ~1.1200 area as the ECB remained relatively dovish and the Fed took the first major steps towards policy normalization. During this time, EUR/USD broke below its 50-day, 100-day, and 200-day moving average decisively, establishing lower highs and lower lows impeccably, a bearish sign according to technical analysis.
The daily chart below shows that the Euro’s pullback was guided by a flawless descending trendline extended from the May high. This line was tested on several occasions, repelling rally attempts, and consistently pushing the price lower. Over the near term, this trendline should continue to act as a solid dynamic resistance.
For the first quarter of 2022, the technical signals remain overwhelmingly negative for the common currency, so a meaningful rebound seems a distant prospect. As such, the path with the fewest hurdles continues to be downwards, but for bearish momentum to gather steam and catalyze the next leg lower, 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 this floor, sellers may become emboldened to drive the pair towards the 1.1000 psychological level, an area that hasn’t been tested since May 2020.
In the event of a bullish reversal, EUR/USD must overcome many obstacles before the technical picture begins to improve, with the first barrier at 1.1370/1.1385. If bulls reassert themselves and manage to propel the price above this ceiling, trendline resistance near 1.1500 would come into focus, followed by 1.1690, the October high. In any case, for a long-term bullish trend to develop, EUR/USD must overtake its 200-day moving average, a far-fetched scenario at this point.
From a fundamental standpoint, there is reason to believe that the U.S. dollar can outshine the Euro in the coming months. One obvious tailwind for the greenback is monetary policy divergence between the Federal Reserve and the European Central Bank. For example, while the Fed is poised to raise interest rates three times in 2022 to counter inflationary pressures, the ECB is unlikely to increase borrowing costs in the upcoming year. For a more comprehensive fundamental analysis, however, please refer to the first part of this guide.
EUR/USD DAILY CHART
Chart created using TradingView