EUR/USD rallied on Thursday, trading up by 0.48% and extending early gains as U.S. Treasury yields dropped, softening the dollar. This move was further supported by narrowing DE-US spreads and gains in equity and gold markets. However, the rally has yet to break Wednesday’s daily range, and the broader trend remains under pressure due to worsening economic conditions in Germany and the recent collapse of its coalition government. German industrial output declined more than expected in September, increasing the probability of a euro area recession. The potential for a confidence vote in January and elections in March adds political risk, which could further weigh on EUR sentiment and support expectations for a deeper ECB rate cut.
From a technical standpoint, EUR/USD’s gains may be limited as bearish signals persist. The pair remains below the 5-, 21-, and 200-day moving averages, and the monthly RSI is pointing to downward momentum, reinforcing the view that rallies may be capped. A reversal in U.S. rate expectations, with the Fed’s terminal rate now projected near 3.75% compared to the ECB’s likely dovish path, further increases the dollar’s advantage over the euro. Immediate resistance lies at 1.0825, Thursday’s high, while support is seen near 1.0775. A break below 1.0775 could encourage further downside toward the October low near 1.0666.
Looking forward, unless euro area growth shows signs of improvement or political uncertainty diminishes, EUR/USD upside is expected to be limited. Friday’s University of Michigan report on U.S. consumer sentiment could provide further direction, particularly if it reinforces expectations for a resilient U.S. economy. The path of least resistance for EUR/USD appears to remain downward, with traders closely watching data and sentiment shifts that could prompt further bearish movement.