EUR/USD forecast: Euro extends gains as dollar loses out

The EUR/USD, GBP/USD and other major FX pairs all bounced back this morning as the US dollar resumed lower. The move higher in the EUR/USD pair was mostly driven by the dollar falling across the board. Also helping the pair is the fact we had some stronger European PMIs from the services sector this morning. While no deal was reached, the fact that Russia said negotiations were "constructive" and denied that Putin had rejected all of US peace plan for Ukraine, saying parts were acceptable, this also helped the single currency. With bullish momentum growing, the EUR/USD forecast remains modestly positive for now.

 

Dollar remains under pressure on rate cut expectations

 

Despite a few half-hearted attempts at a bounce, the US dollar has been under pressure in recent days and now appears to be drifting back into the broader downtrend we saw earlier in the year. It did claw back some ground over the past couple of sessions, helped in part by safe-haven flows rotating out of the high-beta currencies — though that move largely unwound this morning. Even so, a touch more stability in overall risk sentiment is probably required before the dollar can weaken more convincingly against the more risk-sensitive currencies. Against the yen, however, any fresh bout of volatility in equities or bonds could easily drag the dollar lower and weigh on USD/JPY. The euro, meanwhile, has been showing decent resilience and tends to hold its own even when risk appetite cools, reinforcing its shift in recent years towards a quasi-safe-haven role.

 

US data continues to paint a bearish picture, underscored by Monday’s soft ISM manufacturing print. Even if the numbers had surprised to the upside, it’s hard to imagine the market meaningfully rethinking expectations for a December rate cut. Crucially, the major US releases — particularly the jobs report — won’t land until after next week’s Fed decision, which naturally limits how much this week’s data can sway rate-cut pricing. With that in mind, I’d expect the upcoming releases — ADP private payrolls and ISM services PMI today, followed by Jobless Claims and Challenger Job Cuts tomorrow — to broadly reinforce the market’s dovish stance.

 

EUR/USD forecast boosted by Eurozone PMIs

 

Underscoring the sense of relative calm across the eurozone, the German–Italy bond yield spread narrowed to 70 basis points today — its lowest level since 2010. That tightening helped keep the single currency underpinned, particularly as markets continue to scale back expectations of any further ECB rate cuts.

 

The Russia–Ukraine peace discussions remain the main narrative for the euro this week. With the Kremlin denying that President Putin dismissed the entire US peace proposal — noting that certain elements were “acceptable” — markets are still clinging to the possibility of progress. We should soon have a clearer read on whether any meaningful breakthrough is within reach. However, the fact that Putin is showing no signs of compromise over territorial concessions for Ukraine, it looks like the war is going to drag on for now, which is unfortunate. Still, we are now a lot closer to hopefully see peace and an end to the war than ever before.

 

On the data side, eurozone services PMIs were revised modestly higher across the board, nudging the bloc’s final composite PMI up to 53.6 from 53.1. Yesterday’s inflation figures showed headline CPI ticking up from 2.1% to 2.2% in November, while core held firm at 2.4%. For now, disinflationary pressures and persistent pockets of stickiness continue to offset one another — crucially, at levels that don’t justify additional cuts.

 

Markets weren’t banking on an imminent move anyway, and nothing in this week’s numbers materially changes that. While I do think inflation could dip below target in the coming months, the medium-term backdrop still features enough upward pressure to dissuade the ECB from adopting an overtly dovish stance.

 

 

Technical EUR/USD forecast: key levels to watch

 

 

Looking at the EUR/USD chart, the pair has been on the ascendancy for a second consecutive week, following a modest push higher in November. Recent price action has been decisively bullish, and the fact that pair has climbed above several key levels is clearly a positive development in as far as the technical EUR/USD forecast is concerned.

 

The pair recently broke above resistance at 1.1600 and 1.1650. These levels had previously acted as barriers, so the key question now is whether EUR/USD can hold above them—and if so, whether it can build on this momentum to reach 1.1700 and beyond.

 

The next upside target above 1.1700 comes in at 1.1728, the most recent swing high. Beyond that, 1.1800 is the next significant level to watch. We’ll reassess the broader outlook if and when price reaches those highs.

 

On the downside, 1.1600 is now the immediate support area. Below that, the 1.1550 region offers additional support. However, the key support zone remains unchanged: the broad area between 1.1460 and 1.1500, which has repeatedly acted as a strong floor in recent months.

 

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R