EUR/USD Forecast: Oversold, but the downside may not be over
|- The US Dollar rises sharply across the board as Treasury yields soar.
- Markets reevaluate Fed's monetary policy expectations.
- The EUR/USD pair is searching for a new equilibrium level.
The EUR/USD dropped for the fifth time out of the last six days and showed no clear signs of consolidation. The move accelerated on Thursday after breaking below 1.0800, driven by a stronger US dollar in the market.
Comments from Federal Reserve's Logan, mentioning that the data does not support skipping a rate hike at the next meeting, boosted US yields. Market participants now see higher odds of a rate hike at the next meeting (although it remains under 50%) and have pared bets further of rate cuts for year-end.
Economic data from the US on Thursday showed Initial Jobless Claims declining to 242,000, below the market consensus of 254,000. The Philly Fed index improved more than expected, from -31.3 to -10.4 in May. The number and progress in debt ceiling talks continue strengthening the US dollar. US yields reached three-month highs, and the US Dollar Index rose to 103.50.
On Thursday, European Central Bank's Guindos said he is concerned about accelerating inflation in the service sector. The expectation of further rate hikes from the ECB differs from what it used to be for the Euro. The market is looking beyond September. On Friday, Germany will release wholesale inflation numbers. The Producer Price Index is expected to show a 0.5% decline in April, and the annual rate is seen falling from 6.7% to 4%.
EUR/USD short-term technical outlook
The EUR/USD pair is under pressure but has found support above the 1.0750 area. The pair has dropped below the 100-day Simple Moving Average (SMA) for the first time since November. The trend is down, but caution is warranted as the pair can correct higher without changing the dominant bias.
On the 4-hour chart, technical indicators show extreme oversold readings. The Relative Strength Index (RSI) is well below 30. While below 1.0780, another test of 1.0750 seems likely. The mentioned area is a strong support level that could prompt a bounce before another leg is lower. The next support level under 1.0750 is seen at 1.0710. A recovery above 1.0810 would alleviate the bearish pressure. A break of the current downtrend line at 1.0850 could negate the current bearish bias.
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