Last Update: January 11th, 2022

The EUR/USD has always been very trendy; it declines for several years, then turns bullish and increases for nearly a decade, only to turn lower again for the years to come. From 2017 until 2018 this pair trended higher, as the US administration back then wanted a weaker dollar, but then turned bearish until March 2020, when the coronavirus broke out and the USD entered a bearish phase.

In March 2020, the EUR/USD tried the downside as the coronavirus found its way to Europe, but it reversed higher this time, which was a signal about the long term trend reversal. Another strong signal was the bullish momentum which lasted until summer 2021. EUR/USD rallied, leading the forex market against the USD at times, breaking above the 100 SMA which stood at 1.20 on the monthly chart. Now, this pair faces another major resistance zone, stretching from 1.2250 to 1.2350. This resistance area rejected the price twice this year, with the second time in May ending up around 100 pips below the previous high in early January. 

Recent Changes in the EUR/USD Price

The EUR/USD is heavily affected by fundamentals, since these two currencies represent two of the three major economic zones in the world, although it seems like fundamentals are contradictory for now. The economic side is clearly in favour of the USD, since the US economy has been keeping up a good recovery pace after the COVID-19 crash, and particularly in 2021, while Europe fell into another recession last winter. Although, politics haven’t been in favour of the USD which was pushing this pair higher since March 2020. That has been one of the main reasons for the bullish run in the EUR/USD, taking this pair above 1.20 and into the resistance zone above 1.2350, but the situation might be changing now.

The Brexit trade deal, which was reached at the last minute in December last year, was another positive factor for the Euro. Although now, it seems like the sentiment is changing and EUR/USD is turning bearish. Fundamentals are in favour of the USD again, with inflation surging in the US, which has forced the FED to start giving hawkish hints here and there. Technicals also point down, so we might see EUR/USD heading towards 1.15 and 1.20 soon. 

EUR/USD Live Chart

As we mentioned above, the EUR/USD was on a bearish trend from 2008, but the coronavirus situation has been positive for the EUR/USD, which has come largely due to the decline in the USD. In our last forecast, we suggested that the decline in the US Dollar was coming to an end for the reasons mentioned above. The 1.20 resistance zone was also a major area to overcome, according to technical analysis.

But, the decline in the USD continued until the middle of 2021, despite the strong economic recovery. But, it reversed down in June after some hawkish comments from the FED and is more than 5 cents off this year’s highs. Fundamentals are improving in the Eurozone, but they are much stronger in the US. So, now that the decline in the USD has come to an end, the trend is changing. The coronavirus situation is also a major factor, since Europe imposed heavy restrictions last winter, which hurt the economy enormously, sending it into a second recession, so there are quite a few factors in play in the months ahead, which will probably become clear as the weeks go by.

EUR/USD Making the Most of Covid-19?  

The Euro has reacted quite strangely since the start of the coronavirus pandemic. EUR/USD surged higher at the end of February, when the virus made its way to Europe, increasing from 1.08 to 1.15 when the other currencies were crashing against the USD. But, it also turned bearish in the first two weeks of March, falling to 1.0630s. By May, it started reversing higher again, after the shock was over and the USD turned bearish, and it didn’t look back since then. There were two sides to this strong bullish run since March 2020 – the USD, which has been battered during this time and the Euro, which has benefited from all this, leading the way up for most major currencies. But, all this is changing at the moment.

The coronavirus situation doesn’t seem too bad in the US, since there are only a handful of states which are ready to toughen restrictions such as New York and California, while In Europe we are hearing increasing comments about further restrictions due to the Delta variant. In Europe the restrictions were harsher, plunging the economy into another recession last winter. So, regarding the future of the economy in relation to the virus, Europe seems in a worse position right now, leading to Autumn and Winter.

US Fundamentals Look Stronger Than Eurozone Fundamentals  

The fundamental picture is similar to the coronavirus situation which we analyzed above; they are clearly in favour of the USD, since the US economy was doing much better than the economy of the Eurozone, yet the USD was declining until June while the Euro was rallying. Now the Eurozone economy has improved too after the reopening, but inflation is forcing the FED to sound increasingly less dovish, which is helping the USD and reversing EUR/USD lower, as Eurozone core CPI inflation remains subdued. Let’s take a look at the fundamentals for both economies.  

Eurozone June 2021 Manufacturing Report

As shown in the tables above, the manufacturing sector is in good shape right now in the Eurozone, but this wasn’t the case until earlier in 2021. After the first lockdowns in March-May 2020 which sent every sector tumbling lower, the second lockdowns and restrictions weren’t so detrimental for the manufacturing sector and the industrial one. So manufacturing, which has been one the strongest sectors during these times of crisis, since services were decimated due to the lockdowns and all the other restrictions, is keeping up a great pace of expansion.  

US ISM Manufacturing June 2021

US manufacturing, on the other hand, has been surging higher and continues to do so. The final manufacturing PMI report for June, cooled off from the previous month, but it still remains really hot, above 60 points. PMI manufacturing is also showing a great level of expansion in the sector, while ISM prices keep moving higher as well.

Eurozone November 2020 Services Report

The service sector was terribly hit by the coronavirus restrictions, and especially the lockdowns, which are detrimental for this sector, since it relies on physical contact between people. As a result, with the social distancing, this sector suffered terribly. Services fell to record lows all over the world during the spring 2020 lockdowns, and even more so in Europe. This sector rebounded after the reopening in summer last year, but it didn’t last long, and it fell into recession again in September, as the restrictions restarted.

The decline got even worse after restrictions increased in October and November. So, we saw the second recession in this sector and for the whole Eurozone economy last winter, but after the reopening in Q2 the service sector is rebounding again. Although, with the comments that we are hearing about the Delta variant from European officials and the possible restrictions which might be coming in autumn. On the other hand, there are numerous protests taking place all over Europe, so we might not see the same restrictions as before. 

Eurozone June 2021 CPI Inflation Report

Inflation has also diverged in favour of the USD, but the US dollar wasn’t benefiting from it until recently. In Europe, inflation weakened during the first few months of last year, as crude oil prices headed lower, with US WTI Crude falling to $ -37.50. But they didn’t turn negative, as they did since August 2020. The annualized CPI (consumer price index) remained stable at -0.3% for a few months, while the core CPI, which measures the change in the price of goods and services purchased by consumers, excluding food, energy, alcohol and tobacco, held at -0.2%. We have seen a pick up in 2021, but headline CPI has stagnated around 2% in Europe, while core CPI remains at 0.9%. This leaves the ECB in a comfortable position, unlike the FED which is being forced to turn hawkish, since CPI inflation has been above 5% for two months now. The increase in ISM prices also confirms the inflationary pressures in the US. 

Source: Bureau of Labor Statistics

EUR/USD-EXY Correlation

Looking at the Euro index EXY chart as far back as it shows in around 2007, it seems pretty similar to the EUR/USD chart, which is also partly because the USD accounts for a large portion of the weight in the basket of currencies against which the Euro is weighed. During the 2000s, the EXY index was on a bullish trend, as was EUR/USD. But it reversed during the 2008 financial crisis, just above 160 points. The EXY has been very volatile, making some major declines, followed by swift reversals higher. In 2014 we saw a crash lower, after the previous ECB president, Mario Draghi, said that they would do whatever it takes to help the Eurozone economy. This index fell below the moving averages and has remained below them since then.

The 50 SMA (yellow) in particular has turned into the ultimate support for the EXY on the monthly time-frame chart. This moving average provided resistance early in 2018, after the pullback to the lows, and it seems like it is also providing resistance right now – we will expand on this in the technical section below. The DXY index on the other hand, despite being negatively correlated, is not as spot on with the EUR/USD as the EXY. The 100 SMA is not providing support for the DXY, but the price reversed way above it in 2018. So, the USD index is not as closely correlated to the EUR/USD as the Euro index, but it is worth watching it when trading the EUR/USD in the long term.    

After the bullish run from 2000 until 2008, the EUR/USD turned bearish and remained bearish until 2017, or perhaps until March 2020, if you consider that as the real reversal. Although, it is not clear yet whether the bullish reversal has happened or if this is just another retrace before the long-term decline resumes again, as mentioned above. Moving averages haven’t been the most reliable indicators on the monthly chart, although they have done a good job at times. The 100 SMA (green) provided solid resistance during the retrace higher in 2018, reversing the price down, while the 200 SMA (purple) which worked as some support in the 1990s and after 2010 again, added more strength to it. The price broke above the 100 monthly SMA in November 2020 and above the big round resistance at 1.20, but now buyers are looking increasingly weak, unable to push to new highs, which are actually getting lower since 2008.

Buyers are hesitating too long

On the weekly chart, moving averages have been doing a good job as support and resistance since 2015. That year, we saw a major decline in this pair, which took the price from around 1.40 to 1.0440s, stretching into Q1 of 2021 as well. The 20 SMA (gray) couldn’t even catch up with the price back then, but the 50 SMA (yellow) turned, eventually catching up and turning into resistance that year. The 100 SMA caught up later and turned into resistance in 2016, pushing the price lower. The EUR/USD made new lows, falling to 1.0340s. But then we saw a bullish reversal after Donald Trump, who advocated for a softer dollar and lower interest rates from the FED, came to power. The EUR/USD increased to 1.2550s, but then started to decline after the beginning of the trade war between the US and China. The 200 SMA turned into support for this pair for almost two years, but it was eventually broken, as the USD kept marching higher, bottoming out in March 2020, after the breakout of the coronavirus in Europe. Since then, we have witnessed a strong bullish momentum in the EUR/USD, as the dollar kept declining, which saw the pair breaking above 1.20, after failing in the first attempt. The 20 SMA turned into support after the rejection at 1.20 and forced this pair to resume the bullish trend, breaking above 1.20. Although after the reversal down in Q1 of this 2021 and the second attempt at pushing higher after the 50 SMA (yellow) held as support, buyers seem exhausted and now the price is reversing down again, after failing to make new highs in May. 

 Now the 200 SMA comes into play as support

On the daily chart, we see that moving averages were acting as resistance during 2019, until March 2020, as the price was moving lower on a steady downtrend. But in March, the price reversed higher, breaking above the moving averages by May, and eventually those moving averages turned into support for the EUR/USD. When the trend picked up pace, the smaller moving averages provided support, while when the trend slowed, the larger period MAs came into play. After the retreat in Q1 of 2021, this pair formed a bottom at 1.17, which is the target now after the reversal in Q3, while the next two support levels come at 1.16 and 1.15, so let’s see if EUR/USD can break below all these support levels soon.  Will we see a continuation to 1.2550 or a reversal from here?

EUR/USD testing the 20 SMA as resistance now