EUR/USD Hangs on Cliff Edge as Dollar Strength Meets Euro Resilience

The EUR/USD pair is at a critical juncture, poised on the edge of a breakdown or potential recovery. For three weeks, the US dollar has been gaining strength, pulling the euro downward, but the euro hasn't let go yet.

Team US Dollar is winning due to several factors: a more aggressive Fed, higher interest rates making dollars more attractive, strong U.S. yields, a resilient economy, and safe-haven demand. Even big banks like Morgan Stanley are leaning towards dollar strength through year-end and into 2027.

However, the euro isn't defenseless. The European Central Bank has started its own tightening cycle, giving the euro a cushion against rate hikes. Inflation in Europe is heating up, with Friday's flash eurozone inflation report expected to show headline inflation rising to about 3.7% due to energy costs.

The pair is stretched, running low on room after weeks of selling. Buyers have started building a higher-low area at 1.1365-1.1370, but it's not yet a reversal. The levels that decide the fight are crucial: 1.1365-1.1370 and 1.1400-1.1410.