EUR/USD on Breakdown Watch Ahead of Fed Decision

EUR/USD OUTLOOK

• EUR/USD slides on Monday, falling to its lowest level since in nearly seven weeks
• The pair is on track to lose 2.1% in January
• Fed decision to dominate attention this week

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The euro weakened more than 0.4% against the U.S. dollar on Monday, with the EUR/USD exchange rate falling below 1.0800 at one point during the trading session – a multi-week low.

The common currency has been on the defensive in recent days after ECB President Christine Lagarde failed to challenge market pricing of deep rate cuts at the January gathering, and several other policymakers signaled that the next move would be a cut.

Losses for the euro could accelerate if the FOMC surprises this week with a hawkish stance at the end of its first meeting of 2024. Although the central bank is seen holding its policy settings unchanged, it may issue new guidance on the outlook for interest rates.

With the U.S. economy still firing on all cylinders and the labor market displaying remarkable resilience, there’s a chance that the Fed could come out swinging and push back forcefully against expectations for premature and extreme easing. This outcome would spell trouble for EUR/USD.

In the event of the FOMC leaning on the dovish side, U.S. Treasury yields are likely nosedive, propelling EUR/USD higher. This scenario should not be completely ruled out, as progress on the U.S. inflation front may nudge the Fed to start laying the groundwork for rate cuts in the coming months.

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EUR/USD TECHNICAL ANALYSIS

EUR/USD has been losing ground since late 2023, guided lower by a descending trend line, extended from the December high. More recently, the pair has broken below its 200-day simple moving average, triggering a bearish signal for price action.

If the downtrend persists in the near future, support appears at 1.0770, followed by 1.0715. On further weakness, all eyes will be on 1.0640. Conversely, if bulls stage a comeback and push prices upward, resistance stretches from 1.0850 to 1.0865. Looking higher, attention shifts to 1.0920/1.0935.

EUR/USD TECHNICAL CHART

EUR/USD Chart Created Using TradingView