EUR/USD Outlook: The Euro Hits Its Highest Level Since 2021

The EUR/USD pair has now posted six consecutive days of gains in favor of the euro, which currently ranks among the top-performing currencies against the U.S. dollar in the short term. The sustained bullish bias has driven the pair to levels not seen since 2021, mainly fueled by the consistent weakness of the dollar. If this trend continues, buying pressure on EUR/USD could remain strong in the coming sessions.

 

What’s Going On With Central Banks?

This week, Federal Reserve Chair Jerome Powell stated that the U.S. economy continues to show signs of cooling, which could push the Fed toward adopting a more relaxed stance, different from what it has maintained throughout the year, especially if inflation continues to decline steadily.

This new outlook, which markets have been anticipating for months, has been a key factor in the recent shift, as the Fed had previously kept its interest rate steady, which had partially contained the downside pressure on the dollar. However, if the Fed decides to change course and adopt a more flexible policy, it could reduce the appeal of dollar-denominated assets and weaken demand for the greenback, making alternatives like the euro more attractive.

For now, the CME Group’s FedWatch Tool shows a 79.3% probability that the Fed will hold rates steady at 4.5% in its next meeting. However, for the September 17 meeting, the odds of a rate cut to 4.25% have already reached 73.2%. This suggests the Fed may be leaning toward the idea that a rate cut is becoming necessary, and the market is already pricing that in, weighing on the dollar in the short term.

Source: CMEGroup

In contrast, while the European Central Bank’s benchmark rate remains lower at 2.15%, the market has already adjusted to the ECB’s gradual rate-cutting path, and no major surprises are expected. Unlike the U.S., where markets have been anchored to a stable rate environment, Europe offers more predictability in its monetary policy outlook.

Furthermore, if economic uncertainty in the U.S. persists, many investors may opt to hold euro-denominated positions, seeing the dollar as increasingly exposed to domestic risk. In this scenario, a continued negative perception of the U.S. economy, along with expected Fed rate cuts, could further weaken the dollar’s appeal and keep feeding the upward trend in EUR/USD.

 

What’s Happening With the U.S. Dollar?

The DXY index, which measures the dollar’s strength against a basket of other major currencies, is currently hovering near 97 points, its lowest level of the year. This confirms sustained dollar weakness against its main peers in recent sessions.

Source: Marketwatch

This decline has allowed the euro to gain steady traction in the short term, and the DXY index still shows no signs of recovery. If the dollar’s downtrend continues, currencies like the euro, its main rivals, may continue to gain ground, reinforcing the current bullish pressure on EUR/USD.

 

EUR/USD Technical Outlook

Source: StoneX, Tradingview

• Strong uptrend in place: The EUR/USD chart has maintained a solid bullish structure since early March. Momentum has been consistently to the upside, and the pair has printed new short-term highs, further supporting the upward trend. As long as no significant pullbacks occur, the technical outlook remains bullish, making this the most important pattern to watch.

• RSI: The RSI line remains above the 50 level, confirming that bullish momentum has dominated. However, it has now entered overbought territory, suggesting the move may have been accelerated. If the RSI stays above 70, the likelihood of a short-term correction increases.

• ADX: The ADX line is moving above the neutral 20 mark, indicating increased average volatility. Still, it remains relatively close to the neutral zone, and if it fails to rise further, it could suggest a short-term consolidation period.

Key Levels to Watch:

• 1.18875 – Distant resistance: A level that acted as a neutral zone in 2021. A bullish breakout above this area would reinforce the current upward bias and could lead to a more aggressive rally.
• 1.16045 – Nearby support: A recent neutral zone on the chart, which could act as a short-term floor against bearish corrections.
• 1.15000 – Psychological support: Previously a key resistance level, this now stands as the most relevant short-term support. A break below this point could put the current uptrend at risk.

Written by Julian Pineda, CFA – Market Analyst

Follow Him: @julianpineda25