EURUSD broke through the key support and it’s now eyeing the 1.09 handle

The US Dollar has been taking it on the chin for a few months now and eventually it became one of the most crowded trades. In such instances, you should start to get wary and look for inflection points.

In the last few weeks, I’ve been highlighting that positive news on the trade front would have likely boosted the greenback in the short-term because of overstretched positioning. When you are at such overstretched levels, as soon as conditions change, the repricing can lead to meaningful corrections.

In fact, the US Dollar is now driven by the hawkish repricing in interest rates expectations. At the peak of the trade war fears, the market went to price in as far as five rate cuts by the end of 2025, and now following the US-China news, we are down to just two rate cuts (which was the Fed’s base case in December 2024).

This is the best case scenario I’ve outlined here. We should see further gains for the greenback as the market might even start to doubt the need for two rate cuts, but for that, stronger economic data might be needed.

On the 4 hour chart, we can see that we recently broke through the key support zone around the 1.1277 level where we had also the major trendline for confluence. We retested the breakout before opening lower today and then extending the move to the downside as the US-China news hit. The next key levels are the 1.10 and 1.09 handles, but I can see the swing low around the 1.09 being targeted.

On the 1 hour chart, we can see the strong move to the downside following the US-China news. That was the time to sell as we might not get a good pullback after such a surprising news. Remember that the market’s reaction is stronger when it gets surprised. If we do get a pullback though, we should find sellers around the minor downward trendline near the 1.12 handle. If the price breaks higher, then the buyers could take the price to the next resistance around the 1.1277 level.

This article was written by Giuseppe Dellamotta at www.forexlive.com.