EUR/USD Forecast: Another dead cat bounce? Not that many reasons to rise

The EUR/USD bouncing off the 1.1700 level and rising in the European session. After the pair plunged on three negative drivers, it has a few reasons to rise today.

The FOMC Meeting Minutes stated that it would be appropriate to raise rates soon, laying a thick hint that the Fed will raise rates in its June meeting. This was expected and confirms bond markets expectations that stand on over 90% for a rate hike.

On the other hand, the team led by Chair Jerome Powell also expressed tolerance for the inflation rate to slightly overshoot for some time. Is the Fed hoping that inflation will indeed rise and remain sustained above 2%? Perhaps. However, the wording implies a longer break before the next break hike, thus sticking to the dot-plot and increasing rates three times in 2018 and not accelerating the pace to four hikes. 

This tolerance of higher inflation weighed on the US Dollar and allows for some profit taking. 

Another upward driver of the EUR/USD comes from Italy. After Giuseppe Conte was nominated as Prime Minister-designate, markets are speculating about the identity of the Finance Minister. Euroskeptic Paulo Savona is a candidate that worries markets but Luigi Zingales, a moderate, business-friendly candidate is now leading the odds in the rumor mill. This talk helps the common currency recover.

In the background of these two developments, trade issues continue worrying markets and could hurt the EUR/USD on risk-off movements. The Trump Administration is considering new tariffs on vehicles. The week began with optimism about China-US relations and things are souring now.

Another risk-off concern is the cooling down of the peace process in the Korean Peninsula. North Korea and the US cast doubts about the Trump-Kim Summit planned for June 12th. The comments about using the "Libya model" for the disarming North Korea is angering the regime, which fears Ghadaffi's fatal fate. Further deterioration on both fronts could push the safe haven yen higher across the board with the US Dollar following it, gaining against all the rest, including the Euro. 

Later today, the European Central Bank releases its meeting minutes from the April meeting. The document may reveal how worried ECB members are about the slowdown in the first quarter. See the preview: Measuring the moderation, EUR/USD poorly positioned

In the US, we will hear from FOMC members Patrick Harker and Raphael Bostic and Existing Home Sales will also be of interest. Nevertheless, news about trade and further reactions to the Fed are likely to dominate the scene.

EUR/USD Technical Analysis

The EUR/USD is undoubtedly in a downtrend and the recent bounce from the lows of 1.1676 do not change the picture even though the pair broke above resistance at 1.1717, which was a low point on May 21st and in December 2017. The RSI points to oversold conditions but the pair seems to ignore it. Momentum still remains to the downside. The pair also trades below both the 50-day and 200-day Simple Moving Averages. 

1.1717 turns into support and is followed by the low of 1.1676 seen on Wednesday. Further down, 1.1630 separated ranges in November while 1.1550 was the low point around that period of time. 

1.1767 was a swing low earlier this month and it is followed by another trough at 1.1820 which later turned into resistance. The next line to watch is only 1.20.

More: EUR/USD recovery seen capped at 1.1747, a fall could end below 1.1600 — Confluence Detector