The EUR/USD exchange rate recorded 1.0496 last week, its lowest level since October 6, 2024. It is currently trading near the 1.0550 level. It has dropped by approximately 6% since the peak of 1.1214 recorded on September 25, 2024, reaching a low of 1.0497 on November 14. It is also down about 5% since the beginning of the year to date. It seems that the negative momentum for the EUR/USD pair is prevailing in the near term, due to several fundamental and technical factors.
Fundamental Factors:
- Continued weakness in economic data in the Eurozone, especially in Germany and France, the two largest economies in the region. The Eurozone Manufacturing PMI has been in contraction since July 2022, indicating ongoing weakness in the manufacturing sector, especially in Germany, France, and Italy, with the exception of Spain, which is seeing growth in this sector.
- Political uncertainty and the rise of far-right movements in the European Union, in addition to the ongoing political crises in Germany and France.
- Escalating geopolitical tensions between Russia and Ukraine and fears of the outbreak of World War III.
- The election of Donald Trump to the presidency of the United States and his campaign pledge to impose tariffs on European goods exported to the U.S., which negatively impacts the European economy.
On the other hand, the U.S. economy is showing strong economic data, with most economic indicators exceeding analysts’ expectations. In addition, the anticipated expansionary economic and fiscal policies under Donald Trump could fuel inflation, which may force the Federal Reserve to keep interest rates high for a longer period or even raise them, potentially giving positive momentum to the U.S. dollar against most foreign currencies. It is worth noting that there is an important factor that gives positive momentum to the U.S. dollar against most foreign currencies, which is the geopolitical tensions in the Middle East and the escalation of the Russia-Ukraine war currently, as the dollar is considered a safe haven.
The ongoing gap between German and U.S. government bond yields is also pressuring the Euro against the Dollar. For example, the yield on German 10-year government bonds stands at around 2.353%, while the yield on U.S. 2-year Treasury bonds is approximately 4.404%, meaning the gap between them is about 2.051%, which encourages carry trade.
Technical Factors:
- A convergence between the 50-day moving average (blue) at 1.0888 and the 200-day moving average (yellow) at 1.0861. Any bearish crossover or death cross between them would signal a downtrend for the EUR/USD pair.
- The positive directional index (DMI+) is around 7 points, compared to the negative directional index (DMI-) at approximately 28 points. We observe that the gap between these two indicators is relatively large, indicating strong selling pressure on the Euro against the Dollar. Furthermore, the Average Directional Index (ADX) is around 47 points, suggesting strong downward momentum.
- The Relative Strength Index (RSI) is currently around 33 points, indicating the continuation of negative momentum for the EUR/USD pair.
Support and Resistance Levels:
- If the 1.0553 pivot level for the EUR/USD pair is broken, there is a likelihood of targeting support levels at 1.0497, 1.0451, and 1.0395.
- If the pivot point is surpassed, the pair may target resistance levels at 1.0599, 1.0655, and 1.0701.
Please note that this analysis is provided for informational purposes only and should not be considered as investment advice. All trading involves risk.
