EUR/USD is facing renewed downward pressure, with the pair trading below the critical 1.0500 level. This weakness stems from a combination of factors, including fading expectations for aggressive Fed rate cuts, growing concerns about Eurozone growth, and the potential for a more dovish ECB. Technical indicators paint a bearish picture, with key support levels in sight. A decisive break below 1.0450 could pave the way for a move towards parity.

Technical Outlook:

• Current Price Action: EUR/USD is currently trading near 1.0480, having retreated from an overnight high of 1.0539. The pair's inability to sustain gains above 1.0500 highlights the prevailing bearish sentiment and the presence of strong selling pressure at higher levels.
• Key Levels:
  • Resistance: 1.0540 (overnight high), 1.0580 (21-day moving average)
  • Support: 1.0450 (immediate support), 1.0400 (psychological level), 1.0000 (parity)
• Momentum Indicators: The Relative Strength Index (RSI) is trending lower, suggesting waning bullish momentum. Additionally, the pair remains below both its 5- and 21-day moving averages, reinforcing the bearish bias.
• Chart Patterns: A bearish head and shoulders pattern appears to be forming on the daily chart, with the neckline near 1.0450. A confirmed break below this neckline could signal further downside potential.

Fundamental Drivers:

• Shifting Fed Expectations: While the market had been pricing in a near certain Fed rate cut at next week's FOMC meeting, the post-CPI rally in Fed Funds futures stalled below key resistance. This suggests that the market may be reassessing the extent of future monetary easing. With rates markets currently discounting nearly 100bps of Fed cuts in 2025, the reluctance to aggressively price in further easing may reflect growing doubts about the Fed's willingness to continue cutting rates aggressively, especially with concerns that the incoming US administration's focus on tariffs and deregulation could lead to higher inflation.
• ECB Dovishness: Investors are increasingly concerned about the health of the Eurozone economy. Dismal growth prospects raise the risk that the ECB will adopt a more dovish tone than anticipated at its upcoming meeting. ECB staff projections, due Thursday, will be closely scrutinized, with growth forecasts attracting particular attention. Any downward revisions to growth projections could weigh on euro zone interest rates, as investors price in more aggressive easing by the end of next year. Currently, the market is pricing in roughly 150bps of ECB rate cuts. A more dovish ECB stance would likely widen the interest rate differential between the US and the Eurozone, further supporting the dollar and pressuring EUR/USD.

Trading Strategy:

• Short Positions: Consider initiating or adding to short positions in EUR/USD, with a stop-loss order placed above 1.0580 (21-day moving average).
• Profit Targets: Initial profit targets can be set at 1.0400 and 1.0000 (parity).
• Risk Management: Implement appropriate risk management strategies, such as position sizing and diversification, to mitigate potential losses.

Outlook: The near-term outlook for EUR/USD remains bearish. A confluence of technical and fundamental factors is contributing to the pair's weakness. A decisive break below 1.0450 could trigger a further decline towards parity. Traders should closely monitor upcoming data releases and central bank communications for further clues on the path of monetary policy.