EUR/USD Forecast: A drop below 1.1320 could spell trouble for the euro

EUR/USD has staged a modest recovery early Wednesday following Tuesday's sharp decline but the pair could find it difficult to continue to edge higher in the near term. The risk-averse market environment is likely to limit the shared currency's gains and sellers could look to retain control with a drop below 1.1320.

The benchmark 10-year US Treasury bond yield surged to its highest level in more than two years at 1.89% earlier in the day, helping the greenback preserve its strength mid-week. US stocks futures indexes are down between 0.6% and 0.9% in the early European session, suggesting that safe-haven flows could continue to dominate the financial markets in the second half of the day.

Earlier in the day, the data from Germany showed that the annual Harmonized Index of Consumer Prices (HCIP), the ECB's preferred gauge of inflation, was 5.7% in December. Nearly every economist that took part in a recently conducted Reuters survey said that they expect the European Central Bank to hold the policy rate steady well into next year even if inflation continues to run hot in 2022.

Meanwhile, the 10-year German Government Bond yield rose into the positive territory for the first time since May 2019, lending some support to the common currency for the time being.

Later in the session, Building Permits and Housing Starts data from the US will be looked upon for fresh impetus. Investors will continue to keep a close eye on US bond and stock markets.

EUR/USD Technical Analysis

EUR/USD seems to have found support at 1.1320, where the 200-period SMA on the four-hour chart is located. The recent recovery, however, looks more like a technical correction rather than a reversal with the Relative Strength Index (RSI) staying below 40.

In case a four-hour candle closes below 1.1320, additional losses toward 1.1300 (psychological level) and 1.1270 (the starting point of the uptrend coming from early January).

On the upside, 1.1350 (100-period SMA, Fibonacci 61.8% retracement) aligns as the first resistance ahead of 1.1380 (Fibonacci 50% retracement) and 1.1400 (Fibonacci 38.2% retracement).