EUR/USD Analysis: Potential Downside Breakout Ahead?

Key Points:

• EUR/USD shows a triangle/flag pattern on the 8-hour chart, indicating a potential breakout.
• Divergence in central bank expectations: a possible March Fed rate cut versus uncertainty around an ECB cut.
• ECB rate cut speculation faces headwinds due to geopolitical risks and supply chain concerns.

The EUR/USD currency pair appears to be on the brink of a technical breakout, as indicated by its formation of a triangle/flag pattern on the 8-hour chart. This pattern suggests a potential breakout, but the direction remains uncertain. The pair has been consolidating since the start of the year, with the 1.1000 level acting as resistance on multiple occasions.

Currently, market sentiment is divided on the breakout direction, but there is a growing case for a potential downside move. Traders are pricing in an approximately 80% chance of a Federal Reserve rate cut in March, while an ECB rate cut in April is also anticipated. However, doubts about the ECB’s commitment to a rate cut are mounting.

Governing Council member Robert Holzmann has cast skepticism on the likelihood of ECB rate cuts in 2024. Speaking at the World Economic Forum in Davos, Holzmann highlighted the persistent geopolitical risks, such as ongoing conflicts in the Middle East, which threaten Euro supply chains and energy markets. These uncertainties could drive up consumer prices and complicate the ECB’s rate cut plans.

As a result, the potential for a downside breakout in EUR/USD seems increasingly plausible, driven by the divergent expectations between the Fed and the ECB and the broader geopolitical landscape.