EUR/USD Forecast: Finding a floor as positioning unwind runs its course

• EUR/USD showing signs of a near-term floor
• Markets looking through worst-case energy shock risk
• Risk sensitivity greatest in prior market outperformers

Energy shock not breaking EUR

Considering the precarious position Europe finds itself in relative to the United States, it’s notable EUR/USD continues to find support on dips in this environment, suggesting there’s a degree of preemption going on when it comes to the duration of the energy supply shock and the impact it may have on the world’s two largest economies.

What it points to is a market that may already be looking through the worst-case scenario. That doesn’t mean the risks of such an outcome aren’t real, but rather that the broad threat of widespread and long-lasting energy shortages may already largely priced, especially in markets where there wasn’t an extreme build-up in positioning heading into the shock. That view is reinforced by energy futures curves, which remain backwardated, with prices seen easing over time even if elevated relative to pre-war levels.

Despite threats from Donald Trump to “obliterate” Iran’s power plants within 48 hours, and a counter-threat from Iran to shut the Strait of Hormuz and target US-linked infrastructure across the region, the euro's price action has been resilient, hinting European FX names may be close to carving out, a bottom.

Pain concentrated in crowded trades

Granted, the risk of escalation hasn’t gone away, with headlines during the Asia session pointing to fresh Israeli strikes on Iranian infrastructure and reports of attacks on residential areas, further denting risk appetite.

But the market reaction has been instructive. The assets getting hit hardest are the ones that had run the most beforehand, whether it be gold and silver, equity markets like the Nikkei and KOSPI, or high beta FX such as the Aussie and Kiwi, which had outperformed earlier this year, suggesting the unwind is as much about positioning and momentum getting squeezed as it is the geopolitical environment itself.

Shift from energy to rate dynamics

Source: TradingView

Against that backdrop, the correlation matrix for EUR/USD is providing a similar message. The pair has shown a positive relationship with Dutch gas futures over the past week, which is the opposite of what you’d expect given the deterioration in energy supply risks following last week’s attacks on Qatari gas infrastructure.

While there’s been an inverse relationship with Brent, the broader takeaway is that EUR/USD is no longer trading like a pure proxy for near-term energy prices as was the case earlier in the conflict.

Instead, the price action looks far more aligned with shifts in rate expectations, with EUR/USD behaving more like a reflection of the US curve catching up to those abroad rather than energy markets directly.

EUR/USD downside pressure easing

Source: TradingView

From a technical perspective, the price action has been remarkable over recent days. Despite the broader risk-off move, EUR/USD hasn’t come close to retesting the lows from earlier this month, unlike what we’ve seen in other markets. 

RSI (14) is putting in higher lows and pushing back towards the neutral 50 level, while MACD has crossed the signal line from below and is starting to push higher, signalling downside pressure is easing. It comes across as a pair, at least technically, where directional risks are now far more balanced than earlier this month.

1.1550 is the level I’m watching currently. It’s one of those levels that’s entirely untrustworthy to be used as protection, but one you can’t ignore given how regularly price has traded through it before reversing.

For bulls to get excited about a more sustained push higher, the price needs to reclaim former uptrend support dating back to early August last year. We saw a close above that level last Thursday that ultimately proved false, with the high of 1.1615 from that session the level to watch overhead.

A break above would put the confluence of key moving averages and horizontal resistance at 1.1683 on the radar, which looms as a tough test in the current environment.

On the downside, while 1.1550 remains a near-term reference point, buyers stepped in beneath 1.1450 last week, making that level, along with the far more important March 13 swing low just above 1.1400, the key supports to watch.

A break beneath those levels would build confidence that the broader bearish trend is resuming.