Euro Struggles as Dollar Firms Near 1.1500 Level

Key Moments

Consolidation Around 1.1500 Amid Geopolitical Tensions

The EUR/USD pair is stabilizing near the 1.1500 psychological handle in Asian trading on Monday, recovering only slightly after retesting a one-week low earlier in the session. The rebound has been modest, and upward momentum appears constrained as geopolitical risks continue to lend support to the safe-haven US Dollar (USD), limiting gains in the currency pair.

Market sentiment remains fragile as reports indicate that the Pentagon is preparing for weeks of ground operations in Iran. At the same time, participation by the Iran-backed militant group in Yemen, the Houthis, is increasing worries about a deeper conflict in the Middle East. These developments are weighing on risk appetite and helping keep demand for the USD elevated.

Concerns over inflation linked to elevated energy prices are also in focus, reinforcing expectations that the Federal Reserve (Fed) could maintain a hawkish stance. Such expectations provide an additional layer of support for the USD and continue to restrain the upside for EUR/USD.

Technical Landscape: Mild Bearish Bias Persists

From a technical standpoint, the short-term outlook for EUR/USD leans slightly bearish. Spot prices are trading below the flat 200-hour Exponential Moving Average (EMA), currently positioned around 1.1550, which is acting as an overhead cap on recovery attempts.

The Moving Average Convergence Divergence (MACD) line is oscillating very close to both the signal line and the zero line, while the muted histogram underscores the absence of a strong directional move. At the same time, the Relative Strength Index (RSI) is hovering near 43, remaining under the neutral 50 level, suggesting that sellers maintain a modest edge even without aggressive downside pressure.

Key Levels to Watch

Traders are closely tracking a set of nearby support and resistance zones that could define the next directional move for the pair.

Immediate resistance is seen at 1.1535, with a move through that level exposing 1.1550 as the next key barrier, in line with the 200-hour EMA. A sustained break above 1.1550 would reduce downside pressure and could pave the way toward the 1.1580 region.

On the downside, initial support lies at 1.1490. If selling interest intensifies, the next level to watch is 1.1475. A decisive decline below 1.1475 would reinforce the bearish bias and shift focus toward the 1.1450 area.

US Dollar: Structural Context and Policy Drivers

What is the US Dollar?

The US Dollar (USD) is the official currency of the United States of America and functions as the “de facto” currency in a number of other countries where it circulates alongside local money. It is the most heavily traded currency globally, involved in over 88% of all foreign exchange turnover and averaging $6.6 trillion in transactions per day, according to data from 2022.

Following the Second World War, the USD replaced the British Pound as the primary global reserve currency. For much of its history, the Dollar was backed by gold, until the Bretton Woods Agreement in 1971 brought an end to the Gold Standard.

How Federal Reserve Policy Influences the Dollar

Monetary policy set by the Federal Reserve is the single most important factor driving the value of the US Dollar. The Fed operates under a dual mandate: to maintain price stability by controlling inflation and to promote full employment. Its main policy instrument is the adjustment of interest rates.

When inflation rises too quickly and exceeds the Fed’s 2% target, the central bank tends to raise interest rates, which is typically supportive of the USD. Conversely, if inflation runs below 2% or the Unemployment Rate is elevated, the Fed may cut rates, a move that usually weighs on the Greenback.

Quantitative Easing and Its Impact on the Dollar

In more extreme circumstances, the Federal Reserve can expand the supply of Dollars and deploy quantitative easing (QE). QE is designed to significantly boost the flow of credit when the financial system has seized up and banks are reluctant to lend to each other due to counterparty risk concerns.

It is considered a non-standard policy tool and is typically used when lowering interest rates alone is not expected to achieve the desired effect. QE was the Fed’s main policy response during the credit crunch associated with the Great Financial Crisis in 2008. The process involves creating additional Dollars and using them to purchase US government bonds, mainly from financial institutions. QE generally tends to put downward pressure on the US Dollar.

Quantitative Tightening and the Dollar

Quantitative tightening (QT) is the opposite of QE. Under QT, the Federal Reserve stops buying bonds from financial institutions and allows the principal from maturing securities in its portfolio to roll off without reinvestment. This process is usually seen as supportive for the US Dollar.