Deciphering EUR/USD's Decline: Key Drivers & Chart Analysis

With EUR/USD reaching its lowest point since November, let's delve into the driving forces behind this downturn, identify critical levels to monitor, and analyse the lower timeframe price action.

Factors Driving the Decline

There are three key factors currently driving EUR/USD lower:

1. Sticky US Inflation: The US dollar is strengthening across the board due to higher than expected US inflation figures, causing traders to reverse bets on early interest rate cuts by the Federal Reserve (Fed).

2. Policy Divergence with ECB: With the European Central Bank (ECB) signalling interest rate cuts in June, a divergence in monetary policies is emerging between the Fed and ECB.

3. Rising Risk Aversion: Geopolitical tensions, such as fears of conflict between Iran and Israel, also contributed to the dollar's strength as it is considered a safe haven asset.

Daily Candle Chart Analysis: Breaking Key Support

Friday’s price action saw EUR/USD break and close below the cluster of swing lows that formed in December 2023, February 2024 and earlier this month.

This break of support is significant for two reasons:

1. Retest Potential: It sets the stage for a potential retest of the October 2023 lows, some 200 points below current levels.

2. Resistance Formation: The broken support level may act as resistance in the future, potentially creating a zone for short opportunities on pullbacks.

EUR/USD Daily Candle Chart

(Past performance is not a reliable indicator of future results)

Hourly Candle Chart Analysis: Bear Flag Forming

Drilling down to the detail of the hourly candle chart reveals that EUR/USD is currently undergoing a pullback. The pullback has taken the form of a small ascending channel or bear flag.

Traders aiming to align with the prevailing momentum might consider selling on a break below the bear flag, with stop placements above its highs.

EUR/USD Hourly Candle Chart

(Past performance is not a reliable indicator of future results)