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On Monday, the EUR/USD pair continued its decline for the second consecutive day, dropping below the key level of 1.0700 and nearing a five-month low. Amid political uncertainty in Germany, spot prices appear vulnerable to further losses.
German Chancellor Olaf Scholz is under pressure to call for a vote that may lead to early elections following the collapse of his ruling coalition. Last week, Scholz dismissed his finance minister over a budget dispute, leaving the Social Democratic Party and its coalition partner without a majority. The Free Democratic Party subsequently exited the coalition.
Expectations of renewed tariffs on all US imports are also weighing on the eurozone's export sector. This could hinder economic growth and weaken the euro. US President-elect Donald Trump previously warned that the European Union would face severe consequences for insufficient purchases of American exports, promising to impose a universal 10% tariff on imports from all countries. Hopes that Trump's policies will stimulate economic growth and increase inflation further support bullish sentiment for the US dollar. These factors reinforce the short-term bearish outlook for EUR/USD.
On Sunday, Minneapolis Federal Reserve President Neel Kashkari stated that the central bank needs more evidence of inflation returning to its 2% target before making additional rate cuts. However, last week, the Fed hinted at further monetary easing. Traders currently assign a 65% probability to another rate cut in December, prompting dollar bulls to remain cautious ahead of this week's US consumer inflation data. Additionally, speeches from influential FOMC members, including Friday's address by Fed Chair Jerome Powell, are expected to provide further support to the US dollar.
From a technical perspective, the recent break below the 200-day simple moving average (SMA) and last week's dip near the 100-day SMA favor bears. Negative momentum indicators on the daily chart suggest that EUR/USD is likely to continue its downward trend. Consequently, further declines toward the 1.0660–1.0665 zone, followed by the yearly low near 1.0600, appear likely.
Additional selling could pave the way toward intermediate support at 1.0540 before spot prices eventually test the 1.0500 psychological level.
On the other hand, the Asian session high around 1.0727 serves as immediate resistance ahead of the 1.0770 region and the 1.0800 level. Sustained strength beyond this level could lead to a short-covering rally, pushing EUR/USD toward the 1.0860 region near the 200-day SMA, en route to the 1.0900 level and last week's monthly high. A subsequent move higher could pave the way for a recovery toward the 1.1000 psychological level, nullifying the short-term bearish outlook.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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