EUR/USD – Price Analysis and Forecast: Eurozone Tensions Weigh on the Euro

Deutsche Bank analysts attribute the weakening of EUR/USD to widening spreads in Europe and declining banking-sector share prices amid a sell-off. The euro fell sharply against the dollar amid growing market doubts about the European Central Bank's (ECB) ability to raise interest rates again this year.

Revised ECB monetary policy expectations are also weighing on the euro

"Increased financial stress is adding to doubts about whether central banks such as the ECB will be able to raise interest rates as aggressively as previously expected."

"Tighter financial conditions are putting downward pressure on inflation by themselves, while the sell-off in assets is raising concerns about whether the economy can withstand another rate hike."

"Therefore, market expectations regarding ECB policy have changed: the amount of rate hikes priced in ahead of the December meeting fell by 6.1 basis points in a single day, to 23.5 basis points."

On the other side of the pair is the US dollar, while continued geopolitical uncertainty caused by the confrontation between the United States and Iran is supporting the dollar as a safe-haven asset. The US Dollar Index has reached a new yearly high.From a technical perspective, the pair set a new yearly low while holding above the round 1.1200 level. However, as the pair is trading below key moving averages, selling pressure is increasing. A break above the nearest resistance at 1.2700 would give the bulls an opportunity to push the pair toward 1.3220. However, as the oscillators are negative, the bears remain in control of the market. The Relative Strength Index is in oversold territory, suggesting a correction, but this correction is likely to be limited and is more likely to be followed by renewed selling.