EURUSD seems to be gearing up to make new lows, as price is testing the previous ones near the 1.2500 major psychological level. A break below this area could signify that further losses are in the cards for the pair and that selling pressure has strengthened.
Stochastic and MACD are already reflecting oversold conditions though, which suggests that sellers are feeling exhausted and that a bounce might be due. In that case, price could retreat until the SMAs around the 1.2700 mark or until the nearby area of interest at 1.2600 before resuming the drop.
A rally past 1.2700, however, might indicate that buying pressure is returning and that a reversal might be in the cards. If this line in the sand holds as resistance, euro bears might join the downtrend at better prices and eventually push price below 1.2500 onto new lows around the 1.2300-1.2400 major psychological levels.
Major event risks for this EURUSD trade include the ECB interest rate decision on Thursday and the US non-farm payrolls release on Friday. Dovish remarks from the ECB could be the catalyst for a strong downside break, along with strong US jobs data.
From a longer-term perspective, monetary policy differences between the Fed and the ECB could keep the downtrend intact. After all, the ECB just eased a couple of times this year while the Fed just finished its taper and is looking to hike rates sometime next year. The change in the wording of the latest FOMC statement reflects the shift to a more hawkish bias, but this is still up for confirmation from economic data.
The 100 SMA is still moving below the 200 SMA, which suggests that the ongoing selloff could carry on. An upside crossover, however, might signal a quick EURUSD correction as traders could book profits as the year draws to a close.
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