EUR/USD in Downward Spiral after Support Break. What Do Technicals Say?

EUR/USD ANALYSIS:

• EUR/USD plunges on Wednesday, reaching its lowest level since March 17
• Softer-than-expected inflation data in several countries in Europe, together with broad-based U.S. dollar strength, weigh on the common currency
• This article looks at key EURUSD’s technical levels to watch in the coming days

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The euro plummeted against the U.S. dollar on Wednesday as weaker-than-expected inflation data in several European Union countries pointed to a rapid downshift in price pressures in the region, reducing the need for the ECB to deliver several additional interest rate increases in the coming months.

In early afternoon trading in New York, EUR/USD was down about 0.8% at 1.0658, sitting around its lowest point since March 17, a clear indication bulls are starting to throw the towel and flying the coop following the pair’s recent correction.

The common currency was also hit by disappointing Chinese economic data. For context, manufacturing activity fell to 48.8 in May, slipping further into contractionary territory and signaling that the EU economy will receive little boost from the Asian country’s recovery.

The hawkish repricing of the Fed’s policy outlook made matters worse for the euro. A few weeks ago, traders were convinced that the FOMC would hit the pause button at its June meeting, but expectations now favor another 25 bp hike, bolstering the U.S. dollar’s yield attractiveness.

Related: Euro (EUR) Update – German Inflation Turns Lower, EUR/USD Back Below 1.0700

From a technical standpoint, EUR/USD has fallen sharply from its May highs, with the sell-off gathering pace following the invalidation of a medium-term rising trendline late last week, which saw prices breached dynamic support near 1.0750.

In light of recent events, the path of least resistance may be lower for now, but to have conviction in the bearish scenario, the exchange rate needs to break below the 1.0630/1.0600 region. Successful clearance of this floor may expose the 200-day simple moving average near the psychological 1.0500 mark. This level also aligns with the 38.2% Fib retracement of the Sept 2022/May 2023 rally.

Conversely, if EUR/USD manages to establish a base around current levels and resumes its upward trek in the coming days, initial resistance extends from 1.0750 to 1.0785. On further strength, the focus shifts to the 1.0900 handle.

EUR/USD TECHNICAL CHART

EUR/USD Chart Prepared Using TradingView