EUR/USD Bullish Breakout Nears Exhaustion? Key Technical and Macro Factors to Watch

Summary:
The EUR/USD pair has staged an aggressive rally since February 2025, driven by shifting interest rate expectations, improving Eurozone data, and a weakening US dollar. However, technical indicators now signal overbought conditions, suggesting the risk of a pullback or consolidation phase is rising.

📈 EUR/USD Technical Outlook: Overbought But Bullish Momentum Remains

The EUR/USD currency pair has broken decisively above a key resistance zone, signaling strong bullish momentum. Since late February 2025, the pair has surged, with price action consistently closing above the 20-day Bollinger Band midline and eventually breaching the upper band—a classic bullish signal confirmed by expanding volatility.

Bollinger Bands:
The pair is riding the upper band amid widening volatility. This signals a strong upward trend but also hints at potential exhaustion.
Z-Score:
The Z-score has surged into extreme positive territory, aligning with overbought conditions and suggesting caution for short-term buyers.
RSI (Relative Strength Index):
The RSI remains firmly above 70, indicating that the market is in overbought territory. Though no bearish divergence is visible yet, the overextension increases the likelihood of a short-term pullback.

🔍 Support & Resistance Levels

Immediate Resistance:
Recent highs near 1.1500 mark a significant hurdle. A confirmed breakout above this could open the door toward 1.1600 and beyond.
Immediate Support:
The pair is hovering near the former breakout zone. Initial support lies near 1.1400, followed by stronger levels around 1.1330 and 1.1270 in case of a deeper retracement.

🧠 Macro Factors Fueling the Euro’s Rally

The technical breakout in EUR/USD isn’t just about charts—it reflects a broader shift in the macroeconomic narrative.

1. ECB vs. Fed Policy Divergence

Speculation is growing that the European Central Bank may slow its easing cycle, while the Federal Reserve could lean more dovish due to softening US inflation and employment data. This narrows the interest rate differential, supporting the euro.

2. Eurozone Inflation and Growth

Persistent inflation across the Eurozone coupled with improving GDP readings have boosted investor confidence. Meanwhile, signs of a US slowdown—particularly in services PMI—have reduced USD demand.

3. Labor Market Dynamics

The Eurozone’s falling unemployment contrasts with signs of a softening US jobs market, shifting capital flows into the euro.

4. Geopolitical and Policy Stability

With the US embroiled in trade tensions and policy uncertainties, the Eurozone’s relative political stability has added to euro strength.

🛠️ Trading Strategy: Ride the Trend, But Prepare for Pullbacks

Given the overbought indicators, a pullback or sideways consolidation is increasingly likely. Traders may consider:

Buy-the-Dip Strategy:
Entering long positions on retracements to support zones near 1.1400 or 1.1330 with stops below 1.1270.
Avoid Chasing Highs:
Entering at the top of an overbought rally increases risk—wait for confirmation or reversal signs.
Watch Key Indicators:
If RSI starts falling below 70 and the price closes below the Bollinger midline, it could signal a short-term top.

📊 Conclusion: Bullish Trend Intact, But Risk of Correction Grows

EUR/USD continues to benefit from a bullish macro backdrop and strong momentum, but technical signals now warn of potential exhaustion. As long as macroeconomic trends support the euro, the broader uptrend is intact. However, traders should stay alert for consolidation or short-term reversals and manage positions with disciplined risk controls.

Stay Updated with Daily Forex Pakistan.

Hamza Shah