EUR/USD Forecast: A drop to 1.0600 is not ruled out

The intense buying interest in the US Dollar (USD) led the USD Index (DXY) to build on Tuesday’s gains and advance to multi-week highs past the 106.00 barrier on Wednesday, exerting notable pressure on risk-sensitive assets and sending EUR/USD to fresh monthly lows near 1.0660.

The negative sentiment around the euro (EUR) persisted despite decreasing political concerns in France ahead of the June 30 snap elections, while hawkish Fedspeak and the widening gap in monetary policy between the Fed and its major peers collaborated with the move lower.

Furthermore, the macroeconomic scenario remained unchanged on both sides of the Atlantic, with the European Central Bank (ECB) still considering further rate cuts beyond the summer, while market bets suggested two more rate cuts later in the year.

In contrast, market participants continued to debate between one or two rate cuts by the Federal Reserve (Fed) this year, even though the Fed had already forecasted just one cut, likely in December.

Once again, FOMC Governor Michelle Bowman repeated on Wednesday that her basic assessment is that inflation will fall further if the policy rate remains unchanged and that rate decreases will be necessary if inflation gets stably towards 2%.

From the ECB, Finnish policymaker Olli Rehn predicted bumpy inflation in the bloc, but this is expected, while data suggests price growth will meet the 2% target. Additionally, Board member Fabio Panetta suggested the ECB could gradually reduce interest rates as inflation falls, while ECB Chief Economist Philip Lane projected continued interest rate cuts if price pressures ease but may slow down in case of unexpected surprises.

The CME Group's FedWatch Tool now indicates nearly a 63% probability of lower interest rates in September and around 93% in December.

In the short term, the recent rate cut by the ECB, compared to the Fed's decision to maintain rates, has widened the policy gap between the two central banks, potentially leading to further weakness in EUR/USD in the near term.

However, the Eurozone's emerging economic recovery and perceived weakening of US fundamentals are expected to reduce this disparity, possibly providing occasional support for the pair in the near future.

EUR/USD daily chart

EUR/USD short-term technical outlook

If bears remain in control, EUR/USD may first revisit the June low of 1.0666 (June 26), then the May low of 1.0649 (May 1), and finally the 2024 bottom of 1.0601 (April 16).

Occasional bouts of strength, in the meantime, could put the pair on track to revisit the 200-day SMA at 1.0789, prior to the weekly high of 1.0852 (June 12) and the June top of 1.0916 (June 4). The breakout of this level reveals the March peak of 1.0981 (March 8), which precedes the weekly high of 1.0998 (January 11) and the psychological 1.1000 yardstick.

So far, the 4-hour chart has revealed some signs of continued deterioration. The initial resistance is at 1.0746 followed by 1.0761 and 1.0802. The initial support comes in at 1.0666, ahead of 1.0649 and 1.0601. The Relative Strength Index (RSI) bounced to 39.