EUR/USD came under pressure on Friday as banking stress concerns lifted safe-haven assets, but as long as markets foresee central bank policy diverging in the euro's favor, the outlook will remain bullish.
Though bank fears triggered knee-jerk euro selling, they also heightened the interest rate trends that are EUR/USD supportive -- particularly the massive repricing of Fed policy expectations.
The dollar is facing a major headwind as SOFR SRAU3 and Eurodollar EDU3 remain near recent highs following sharp rallies, with Fed rate cuts projected as early as Q2 2023 and continuing until Q3 or Q4 2024.
Euribor futures FEIZ3 prices have not risen as sharply, with ECB cuts projected to be less aggressive than Fed easing, which should prevent significant EUR/USD drops and possibly buoy the pair.
Meanwhile, technicals are sending mixed messages.
Daily RSI is falling and a drop followed Thursday's inverted hammer candle, but monthly RSI is rising.
Monthly charts also show the right shoulder of a large head-and-shoulders bottom forming.
On balance, EUR/USD longs are facing short-term risks to the downside, but longs may be rewarded if they can stomach a bit of turbulence.
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