EUR/USD outlook: Bearish trends and Market reactions

On Friday, the EUR/USD exchange rate managed to stay above the $1.0652 support level, but its future trajectory remains unclear. According to Danske Bank experts, the direction of the EUR/USD pair in the upcoming days could be heavily influenced by geopolitical events over the weekend. If there are no significant new geopolitical developments, the market might react strongly to correct the recent price drop.

However, despite this possibility, the fundamental outlook projected by Danske Bank still suggests a bearish trend for the Euro against the Dollar, with a potential target price of around $1.03 by the end of 2024. This cautious view reflects the ongoing uncertainties affecting the Euro's strength.

The EUR/USD rate has consistently found support at approximately $1.06, and its quick bounce back to $1.0650 indicates that buyers are still active and could push the price to test resistance levels at $1.0689 and then $1.0722. From one perspective, investors have become accustomed to the ongoing conflict in the Middle East, showing a tendency to overlook dramatic headlines that suggest a potential escalation into World War III.

On the other hand, emotional trading continues to play a significant role in the market dynamics. Concurrently, Wall Street is in the midst of an earnings season, which is closely watched as it influences the future monetary policy decisions of the U.S. Federal Reserve.

The market appears to be disregarding the hawkish comments made by the U.S. Federal Reserve, with investors opting to wait for the Fed's rate decision in June. The general market consensus is that interest rates will remain at their current levels until at least September of this year, when the Fed is expected to commence rate reductions. This shows a significant expectation of policy stability in the short term, which contrasts with the potential volatility highlighted by market analysts.

In the recent month, there's been a noticeable disparity between the market's expectations for interest rate cuts from the Federal Reserve compared to those expected from the European Central Bank (ECB). The Fed is estimated to cut about 45 basis points throughout the year, while expectations for the ECB are set at around 85 basis points. Despite these projections, analysts at Danske Bank predict that the Fed will begin lowering rates in June with two additional cuts to follow by year-end.

They also foresee similar actions from the ECB after a significant initial cut in June. This aggressive reassessment by the Fed, according to Danske Bank, seems overdone and if their analysis holds true, it could lend support to the Euro against the Dollar in the near future.

Looking at the longer-term prospects, the EUR/USD might continue to depreciate if the Federal Open Market Committee (FOMC) decides against cutting interest rates in June and maintains a hawkish stance. Danske Bank analysts maintain that the fundamental economic indicators suggest a bearish trend for the Euro over the medium term. They argue that the currency pair has limited potential to revert to an upward trend, and any significant upward movement should be viewed as a temporary correction.

A move well above $1.07 could suggest a shift towards market consolidation, but overall, the divergence in monetary policy between the ECB and the Fed, alongside stronger economic data from the U.S., is expected to pressure the EUR/USD lower towards the target of $1.03 by the end of this year. This scenario is underpinned by expectations of continuing divergence in policy approaches between the two central banks.

EUR/USD daily chart, MetaTrader, 20.04.2024

20.04.2024