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EUR/USD struggles above key support amid dollar strength, euro political concerns

EUR/USD has taken somewhat of a beating in the last three weeks as the US dollar has continued to recover from multi-year lows and political concerns have impacted the Eurozone. Despite these forces pressuring EUR/USD, however, the currency pair has remained relatively resilient not too far off its early September high around the key 1.2100 resistance level. Since that high, EUR/USD has broken down below both its 50-day moving average as well as a key uptrend line extending back to mid-April. In the aftermath of these breakdowns, price is currently just above the key 1.1700 support level.

Aside from a European Central Bank that has been reluctant in addressing QE tapering, recent political risks have been the most salient factors pressuring the euro lately. Despite a victory for incumbent Chancellor Angela Merkel and her party, last week's German federal election saw the unexpected rise to prominence of a right-wing, nationalist and anti-EU group in the AfD. This creates a potential threat to the euro within the Eurozone's largest economy, and indeed hit the shared currency significantly after the results of the election were known.

Most recently, this past weekend saw a heavily-contested referendum to vote on independence for Spain’s Catalonia region. While the Spanish federal government deemed this vote illegal, around 90% of Catalonian citizens who were able to vote, voted for independence from Spain. This also hit the euro on Monday, but the lasting implications of these vote results are likely to be muted, as the question of Catalonian independence should have a limited impact, if any, on the future viability of the European Union and Eurozone.

Perhaps the most important factor weighing on EUR/USD is that of US dollar strength. The dollar continued to surge on Monday, extending its recovery from long-term lows that has been in place for the past three weeks. Partially driving this recovery have been rising expectations for higher interest rates from the Federal Reserve in December and beyond. Also boosting the dollar have been recently restored hopes for US tax reform and deregulation, two of President Donald Trump’s major campaign promises. Although it remains questionable if and when these measures will pass through Congress, renewed expectations have helped to support the US dollar.

Amid these forces pressuring EUR/USD, the currency pair has remained relatively resistant given the circumstances. From a technical perspective, the key test, as noted, will be whether EUR/USD is able to remain above the critical 1.1700 support level. If it continues to be supported at this level, a potential rebound to resume the longstanding uptrend could follow. A sustained breakdown below support, however, would be a significantly bearish technical event for the currency pair. In that event, the next major downside targets are at the key 1.1600 and 1.1450 levels.

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