After a prolonged period of strength in the US dollar, the EUR/USD exchange rate has fallen back to key support levels. With central banks in the spotlight this week, the pair may soon face its first real test of monetary policy since the conflict with Iran erupted.

The first political test of the energy shock

Over the past two weeks, currency markets have repriced the rapidly changing macroeconomic landscape. The conflict in Iran has added new uncertainty to inflation expectations, forcing investors to reassess how quickly central banks can move away from tight monetary policy.
That leaves us with an extremely busy interest rate decision schedule this week. The Federal Reserve will be the first to take action on Wednesday, followed by the European Central Bank, the Bank of England and the Bank of Japan. Not many expect a change in monetary policy, but that is rarely the main goal in a central bank week like this. What traders hear is the tone of the speech. Even small changes in the way policymakers describe inflation expectations could be enough to alter market expectations in interest rate markets.
For currency markets, these shifts are important. Currency pairs such as EUR/USD ultimately reflect the spread between monetary policy expectations, and when those expectations start to change, exchange rates often follow. The recent strength in the U.S. dollar could find additional support if policymakers appear more cautious about inflation expectations.

Key support level: False breakout or imminent collapse?

After forming lower highs last week and then retracing strongly at the close of the weekly candle, EUR/USD momentum appears to be clearly tilted to the downside. The pair is now approaching a potentially important area of ​​support near the August 2025 lows, a level that previously served as an important inflection point on the weekly chart.
When markets return to established support levels after a strong directional move, the reaction is often revealing. Either buyers step in and the market stabilizes, or the prevailing trend continues to strengthen and push prices above this level. With a heavy economic calendar approaching this week, the area could become a battleground between trader positions and changing expectations for monetary policy.
Turning to the hourly chart can provide more details on how the recent decline has developed. EUR/USD has been trading lower within a clear bearish channel, reflecting gradual selling pressure rather than a chaotic sell-off.
For traders who use the daily time frame as the main reference for analysis, this structure presents two clear scenarios.
The first scenario is a decisive break below the recent lows followed by a retest, which could signal continued bearish momentum.
The second scenario represents a temporary decline followed by a rapid recovery of that level and a breakout of the descending channel, which may indicate a failure to break out and open the door to a short-term reversal.

EUR/USD Daily Candlestick Chart

Past performance is not a reliable indicator of future results
EUR/USD Hourly Candlestick Chart

Past performance is not a reliable indicator of future results

Disclaimer: This article is for educational purposes only. The information provided does not constitute investment advice and does not take into account any investor’s personal financial situation or objectives. Any information that may be provided regarding past performance is not a reliable indicator of future results or performance.

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