EUR/USD Forecast: Euro Continues to Shy Away from Barrier

• The Euro drifted a little bit lower against the US dollar again on Tuesday, trying to find a way to rally through the massive 1.18 area.

EUR/USD

The Euro drifted a little bit lower against the US dollar again on Tuesday, as we just don't have the momentum to break above the 1.18 level. That does make a certain amount of sense, considering that we are heading into the New Year holiday. Most people just aren't even trading, and without that momentum, it’s hard to break above what has been an obvious strong barrier from 1.18 to the 1.1850 region.

Ultimately, the question now becomes whether or not we can find enough momentum to break out, or if we pull back towards the 50-day EMA. I suspect a pullback probably makes more sense than not, but we'll just have to wait and see. A lot of this comes down to thinking that the Federal Reserve is, in fact, going to cut rates a couple of times in 2026, but if they see some type of economic data that suggests they shouldn't, that could collapse this pair.

Federal Reserve Policy and Economic Momentum

We have seen some signs of stronger-than-anticipated US economic momentum, and as long as that’s the case, there's a very real threat to the downside. Having said that, I don't think that the trend changes until we break down below the 1.14 level.

As things stand right now, I more or less look at this as a status quo type of setup. We're just going to stay in the same consolidation area, so I do favor the downside over the upside at the moment. That being said, if we can break 1.1875, then the whole narrative flips, and we continue going higher. Typically speaking, a rally followed by consolidation does lead to continuation, but this consolidation is for half a year. That’s a bit long for typical consolidation, and of course, there are several things going on at the same time that could be dollar positive. Not only will the bond market dictate this, but simple risk appetite.

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