EUR/USD on Cusp of Major Breakdown as US Dollar Embarks on Strong Recovery

EUR/USD SUPPLY ZONE

• EUR/USD falls and tests trend support in the middle of a broad base US dollar strength
• The recent jump in US Treasury yields boosted the greenback’s recovery
• This article focuses on euro‘s main technical levels to watch in the coming days

Most Read: Gold Fades but Upside Still Favored as Debt-Limit Talks Hit Crunch Time

The US dollar has recently started a strong recovery, driven by rising US Treasury yields thanks to the exceptionality of the US economy. US business activity and the labor market have held up remarkably well in recent months despite many headwinds, including the banking sector turmoil that erupted in March.

Economic resilience has led some Fed officials (Bullard, for example) to take a more hawkish stance, leading them to support further tightening and higher rates for longer. Against this backdrop, yields have rebounded significantly, with the 2-year note rising from a low of 3.65% this month to 4.4% at one point Tuesday morning, a significant move in a short period by bond market standards.

The resurgent US dollar has hurt most developed market currencies, such as the euro and the yen. For example, EUR/USD fell almost 3% from its May peak, although some idiosyncratic factors also contributed to the common currency’s underperformance, such as the decline in manufacturing in Germany.

Related Reading: Nasdaq 100 Rooted in Undisputed Uptrend but Poor Market Breadth Is Ominous

Looking ahead, there is reason to believe that the US dollar could retain the upper hand a little longer. One potential bullish catalyst is the US debt ceiling. Volatility could rise sharply in the coming days if Congress fails to reach an agreement to raise the country’s borrowing capacity in the near term, boosting safe-haven demand.

While lawmakers are likely to reach an agreement at some point, it may not happen until the eleventh hour, when markets have already begun to convulse. History suggests that only panic tends to unite political parties in Washington. As the market becomes more nervous about a possible US default, EUR/USD could extend its slide near term.

EUR/USD TECHNICAL ANALYSIS

After the recent pullback, EUR/USD is testing trend support near 1.0775/1.0770, that last line of defense against a deeper pullback. If bulls fail to protect this floor and prices slide below it, selling pressure could accelerate, setting the stage for a move to 1.0625.

On the upside, if the pair manages to establish a base around current levels and reverses higher in the direction of the broader trend, initial resistance appears at the psychological 1.0900 mark, slightly above the 50-day simple moving average. Moreover, the focus shifts to the highs of 2023.

EUR/USD TECHNICAL CHART

EUR/USD chart prepared using TradingView