EURUSD rally faces potential correction toward 1.165

The EURUSD pair continues its medium-term uptrend but may be due for a corrective pullback. After surpassing 1.18 yesterday, its highest level since late 2021, the rally shows signs of exhaustion. The pair has not seen even a minor downward retracement in two weeks, with the last significant correction occurring in mid-May. Both technical indicators and a shifting fundamental backdrop now suggest increased downside risks for the euro.

Luis de Guindos, Vice President of the European Central Bank (ECB), warned that a sustained rise EURUSD above 1.2 could force the bank to downgrade its GDP and inflation forecasts. An overly strong euro would hurt the competitiveness of European exporters and suppress inflation via cheaper imports.

To curb further appreciation, the ECB may extend its rate-cutting cycle. While a pause is likely in July, the odds of additional easing this autumn have risen sharply. The EURUSD long-term average since 1999 stands at 1.183, a level whose breach would likely raise concerns among policymakers. With the EU economy just emerging from two years of stagnation, such euro strength could undermine the recovery.

Bloomberg analysts are paying close attention to the state of Germany's economy. Its main growth driver remains manufacturing export, with the current account surplus reaching a record 250 billion euros ($290 billion) last year. A stronger euro would adversely impact foreign trade in Germany and other EU nations, while domestic consumption growth would be insufficient to fully offset export losses.

On the EURUSD daily chart, the RSI and Stochastic oscillators have entered overbought territory and are nearing sell signals. A pullback toward 1.165 would offer bulls a breather without violating the broader uptrend line.

Consider the following trading strategy:

Sell EURUSD at the current price. Take profit – 1.165. Stop loss – 1.195.