The coming weeks will be critical, from a technical as well as fundamental perspective, to determining the Euro-to-Dollar pair’s medium term trajectory.

The five-month long uptrend seen in the Euro-to-Dollar pair has been eroded by recent losses and some technical strategists now fear further downside is afoot for the common currency.

Europe’s currency, like many others, has been pushed onto the back foot by a US Dollar that is resurgent amid speculation that control of the Federal Reserve interest rate setting committee may pass into the hands of “hawk” from February 2018.

Monetary policy hawks are those who favour higher interest rates. The expiration of incumbent Fed Chair Janet Yellen’s term in February, and President Donald Trump’s entertaining of potential replacements, has rebooted the greenback as markets bet on a changeover at the top of the Fed during the coming months.

Strategists at Commerzbank noted Wednesday that the EUR/USD pair is approaching a key support level at 1.1669. They note that a break below here would signal to traders that a technical “top” has formed on the charts, suggesting a downtrend could soon establish itself.

“Such a move would trigger a sell-off to the mid-June high at 1.1296 and the more important 1.1110 end of May low,” says Axel Rudolph, a technical analyst at Commerzbank.

The coming weeks will be critical, from a technical as well as fundamental perspective, to determining the Euro-to-Dollar pair’s medium term trajectory.

“These levels will remain in focus while the recent minor high at 1.1880 caps,” says Rudolph, noting the five month uptrend in the pair has been eroded.

The seemingly dire warning over Euro-to-Dollar price action marks a departure from the recent narrative around the two currencies.

Until late September the US Dollar had spent much of 2017 being kicked from pillar to post, and into the gutter at one point, leading to a double digit 2017 loss for the Dollar index in August.

US Dollar Index. Source: Netdania MarketsThis saw EUR/USD briefly trading as high as 1.2090 during September for the first time in more than two years.

The greenback’s earlier decline was the result of persistently low inflation and a series of weaker than expected economic numbers, which saw markets all but give up hope of any meaningful policy action from the Fed over the near term.

5% Upside For The Dollar?

Strategists at Japanese bank MUFG said Tuesday that the Dollar could rise as much as 5% in the event that Stanford University economist John Taylor, the current frontrunner, becomes President Trump’s nomination for Fed Chair from February 2018.

“A potential shift in strategy towards a more rules based approach for setting policy would be seen as less supportive for financial markets and increase the likelihood of the Fed raising rates materially more in the coming years than is currently priced in,” says Lee Hardman, a currency analyst with MUFG in London.

Taylor became the frontrunner candidate after reports of a positive interview with Donald Trump earlier this week.

“Powell is now in first place (~35%) and it’s a three-way tie in second place between Warsh, Yellen and Taylor,” says Elsa Lignos, global head of foreign exchange strategy at RBC Capital Markets.

An announcement regarding the position is expected over the coming weeks. But regardless of what happens in the race to head the Fed next year, existing policymakers have already affirmed their intention to stay the course toward a more normalised monetary policy environment.

This means higher interest rates are in the pipeline, regardless of where current inflation measures are, and was the catalyst behind the Dollar’s recovery in late September.

Downside risks are clearly building around the Euro-to-Dollar pair over the near term but not everybody is pessimistic about the broader outlook.

“We see EUR/USD around current levels on a 1-3M horizon but stress that risks are on the downside in the very near term with a key risk being the appointment of a more hawkish Fed Chair,” says Christin Tuxen, an analyst at Danske Bank. But she also writes; “We continue to stress that a 2018 rebound towards 1.25 is on the cards and that upside risks dominate the longer-term outlook.”

Commerzbank’s Rudolph also flags a bullish technical picture outside of the very short term. If the Euro-to-Dollar rate holds up over the next few weeks, it could soon conquer its 2017 peak above 1.2050.

“The next higher early August high at 1.1911 guards the 1.2092 September high,” Rudolph writes. “Above 1.2092 would target the 50% retracement from the move down from the 2014 high at 1.2168 and the 1.2383 200 month moving average, but if seen, that is expected to hold.”