Since the summer, market volatility has largely slowed and when we see market scenarios like these some currencies tend to perform better than others. Specifically, stability in the financial markets tends to benefit the US Dollars as forex investors are looking for safe haven stability from the world’s larger economies. This general rule has held up in some cases, while in others it has not. But when we look at the fundamental trajectory of some of these economies, some very clear weaknesses have started to appear.
Most important here is the divergences that are now being seen in the likely policy actions of the European Central Bank (ECB) and the US Federal Reserve. Renewed interest at the Federal Reserve to start normalizing its historic interest rate policy is something that will continue to benefit the Dollar, and this is not something that is seen at the same time in the Eurozone. This creates some important implications for the likely direction of the EUR/USD forex pair.
Price Outlook: EUR/USD
From the shorter term perspective, it might appear as though the EUR/USD is finally overcoming its lows and that we will now start pushing toward new highs. But when we take a step back and look at EUR/USD prices from the yearly perspective, we can see that things are not quite so optimistic.
Specifically, we are now headed toward important psychological resistance in the 1.10 area and this is not something that is likely to be overcome in any sort of valid fashion any time soon. It is possible that we will see a few pops above this psychological resistance. But when we take the diverging central bank views into consideration, it makes much more sense to look to start playing this pair from the bearish perspective.
In terms of broad targets, the first “line in the sand” to watch is the 1.05 level. This is historical support that has been tested on more than one occasion, so if we do see any clear violations here we will almost certainly see large stop loss orders being tripped. This should ultimately send prices back toward parity in relatively short order. For these reasons, the 1.05 level in the EUR/USD is arguably one of the most important support zones in the market — and downside breaks here will likely lead to Dollar strength against the other major currencies, as well.