EUR/USD analysis: Outlook remains negative amid raised geopolitical risk

• EUR/USD analysis: Deteriorating Russia-Ukraine situations add to euro-negative factors
• Dollar remains overall supported but seasonality factors soon to come into focus
• EUR/USD technical analysis: 1.0500 key support; 1.0590-1.0600 is short-term resistance

 

Though the EUR/USD bounced off its earlier lows, it remains a challenging environment for the pair as it struggles below $1.06, weighed down by multiple bearish factors. Geopolitical tensions, eurozone instability, and the continued strength of the US dollar are preventing the euro from making at least a short-term comeback. While these factors and the technical EUR/USD analysis both point to further losses as it holds near the $1.05 support level, December seasonality means the correction potential is there. But ultimately, in a bearish macro environment, the direction remains southbound even if we do see bounces here and there.

 

 

Deteriorating Russia-Ukraine situations add to euro-negative factors

 

On the geopolitical side, the Russia-Ukraine conflict has escalated. Confirming earlier reports, Russia has said that Ukraine has indeed fired US-supplied long range missiles into Russia for the first time. The news rattled markets this morning, driving European stocks lower and reinforcing bearish momentum for EUR/USD.  The big worry here is how Russia is going to respond now. President Vladimir Putin's approval of an updated nuclear doctrine, broadening the conditions under which Russia might deploy nuclear weapons, including in response to a large-scale conventional attack on its territory. Use of atomic weapons is unthinkable, but we are getting close to very dangerous territories.

 

Meanwhile, Europe’s reliance on trade with China exposes it to economic vulnerabilities. China's slowdown—caused by a property crisis and reduced demand—has sharply impacted Germany, further darkening the eurozone’s growth outlook.  This has been highlighted by weak sentiment indicators, such as the closely followed German ZEW survey showing a sharp decline. Adding to this, Chancellor Olaf Scholz is contending with a no-confidence vote, leading to snap elections in early 2025. 

 

So, a closer look at the EUR/USD analysis therefore shows the pair is held back by several factors, ranging from political and economic uncertainty to geopolitics.

 

Dollar remains overall supported but seasonality factors soon to come into focus

 

Another key theme is the strength of the US dollar, which remains on the front foot against most major currencies bar the yen. Bolstered by resilient retail sales data and stronger inflation data last week, the greenback found further support after Federal Reserve Chair Jerome Powell’s hawkish tone further reduced market expectations for a December rate cut. This comes as fiscal optimism tied to pro-growth policies under Trump’s administration continues to lend support to the greenback.

 

While geopolitical risks have buoyed safe-haven assets like gold and the yen, the dollar remains the primary beneficiary in forex markets, keeping the EUR/USD pair under pressure for the time being.

 

But as we approach year-end, December seasonality introduces a potential wildcard in the EUR/USD analysis. Historically, the dollar index has weakened in December, declining in eight out of the past ten years, including in the last seven consecutive years. If this trend repeats, a short-term correction in the greenback could provide some breathing room for EUR/USD. 

 

Technical EUR/USD analysis: Key levels to watch

 

Source: TradingView.com

 

Technically, the pair remains in a bearish trend. Resistance near $1.0590–$1.0600, a former support level, has capped recent rallies. So, a break above here is needed to tip the balance in the bulls’ favour in the short-term outlook. However, a decisive break below the critical $1.05 support could expose the October low at $1.0448, with further downside likely if dollar buying persists. 

 

PMIs among handful of key data to watch this week

 

This week’s sparse economic calendar shifts attention to other global catalysts like the Russia-Ukraine conflict, but on the macro side, those global manufacturing and services PMIs on Friday could provide some direction for the EUR/USD. Eurozone PMI data will be closely monitored for signs of economic health. Weak prints could deepen the bearish sentiment, while stronger numbers might trigger a short squeeze. 

 

In a nutshell

 

So, the EUR/USD analysis underscores a bearish outlook, with the pair navigating eurozone challenges, geopolitical tensions, and a strong US dollar. While December’s seasonal trends could limit the dollar’s rally, the euro’s structural weaknesses suggest that any recovery in EUR/USD is likely to be corrective rather than trend-defining. For now, a break below $1.05 remains the more probable scenario. 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R