EUR/USD Forecast: Another leg up with Lagarde? ECB optimism is partly in the price, levels to watch

Buy the rumor, sell the fact? Expectations for the European Central Bank's decision have been rising and boosting the euro in recent days – potentially sending the common currency too far. On the other hand, the recent slide from the high of 1.1257 to around 1.12 may leave room for a resumption of the rally.

What is expected of the ECB?

The Frankfurt-based institution is expected to enlarge its Pandemic Emergency Purchase Program (PEPP) – the newest of its bond-buying scheme launched in March in response to coronavirus. The current program is worth €750 billion and is set to run out of funds in September or October.

Speculation ranges from a top-up of €250 billion to as much as €750 billion. A remote option is that the bank only announces its intentions to expand the scheme in its next meeting. For the euro, the bigger the package, the better. Contrary to pre-pandemic times, money-printing is now seen as enabling governments to speed up the recovery rather than devaluing the exchange rate.

Christine Lagarde, President of the ECB, recently said that the mild scenario for coronavirus carnage is outdated, adding to speculation for a significant expansion of the PEPP. She will be presenting new staff forecasts for growth and inflation. While gloomier scenarios may prompt further monetary support and boost the euro, they could also weigh on it.

• EUR/USD Forecast: With many boosters, overbought conditions may be only a temporary speed bump
• ECB Preview: The bond-buying panacea

The ECB buys the debt of European countries, especially the hardest-hit ones such as Italy, and bond yields of the third-largest economy have been falling in recent weeks. The spread between German and Italian yields dropped below 200 basis points. 

In turn, the German government took another step in abandoning its financial crisis-era austerity policies, by approving a stimulus package worth €130 billion, 30% more than expected. The plan includes tax cuts and infrastructure spending and will not only help the continent's largest economy but is also likely to inspire other countries to spend. That is positive news for the common currency. 

Coronavirus cases continue falling in the old continent, where countries are gradually opening borders.

US developments

In the US, protests against racial discrimination have calmed down after a turbulent week. Prosecutors in Minnesota upgraded the murder charge against the police officer that killed George Floyd, an unarmed black man, contributing to the calm. While President Donald Trump has been slipping in opinion polls, markets have largely ignored the events. 

US economic figures beat expectations, raising expectations ahead of Friday's Non-Farm Payrolls report. The ISM Non-Manufacturing Purchasing Managers' Index jumped to 45.8, yet still reflecting contraction. ADP's private-sector jobs report surprised by reporting a loss of only 2.76 million jobs, raising many eyebrows. However, the firm's figure and the official NFP were well-correlated in April.

Weekly jobless claims are set to drop below two million, extending the downtrend. The data is for the week ending May 29. 

See: Jobless Claims Preview: It must be spring--signs of recovery

Sino-American tensions remain elevated, with the US banning Chinese airlines from flying into the US, a countermeasure against a similar move from Beijing. China denied it has reduced soybean buying from America, part of the trade deal. While that accord is upheld, investors will likely shrug off these tensions. 

COVID-19 deaths have topped 1,000 once again in the world's largest economy after several days below that level. Cases are falling in some states but are on the rise in Texas, California, and other areas.

Overall, the ECB stands out in Thursday's trading, yet American developments are also eyed. 

EUR/USD Technical Analysis

The recent retreat from the highs looks like the necessary downside correction that may precede another leg up. The Relative Strength Index on the four-hour chart has dropped below 70, exiting overbought conditions. Momentum remains to the upside and the pair is trading well above the 50, 100, and 200 Simple Moving Averages. 

Resistance awaits at 1.1230, a stepping stone on the way up in recent days, followed by a recent peak of 1.1257. The next big levels to watch are 1.1360 and 1.1410. 

Support awaits at 1.1280, a support line in recent days, followed by 1.1150, a swing high from April, and also a separator of ranges. The next levels are 1.1080 and 1.1030.