EUR/USD Forecast: Bulls now shift their attention to 1.1000

Once again, EUR/USD succeeded in surpassing the crucial 1.0900 threshold, climbing to multi-week highs amid intensified selling pressure that weighed heavily on the US Dollar (USD). This pressure was particularly pronounced after Chair Jerome Powell’s testimony fell in line with investors’ expectations, while disappointing readings from the US labour market also added to the sour mood surrounding the Greenback.

On the latter, the USD Index (DXY) declined for the fifth consecutive session, lingering around five-week lows just above the 103.00 milestone, accompanied by further decreases in US yields. This trend persisted against the backdrop of persevering speculation regarding a potential rate cut by the Fed at its June 12 gathering.

Still around money markets, in Germany, 10-year bund yields dropped to multi-week lows around 2.25% after the ECB left its interest rates unchanged, as broadly anticipated.

Regarding Powell's remarks, in his prepared statement, he hinted at the likelihood of interest rate reductions within the year. However, such measures would only be enacted once the Fed gains greater confidence in the trajectory of inflation returning to its targeted annual rate of 2%.

So far, and according to the FedWatch Tool by CME Group, expectations of a rate cut in June increased to approximately 60%.

Back to the ECB event, the bank predicts a 1.5% growth in the economy in 2025 and 1.6% in 2026, driven by consumption and investment. It also plans to reduce the PEPP portfolio by €7.5B per month in the second half of the year. Furthermore, inflation projections have been revised down to 2.6% for 2024, 2.1% for 2025, and 2.0% for 2026 and the growth projection for 2024 has been revised to 0.6%, with economic activity expected to remain subdued.

At her press conference, President Lagarde argued that there is a slowdown in demand for labour and elevated domestic price pressures. She further mentioned that signs indicate a moderation in the growth of wages. Additionally, she remarked that inflation is expected to decline to the target level and noted that longer-term inflation expectations mostly hover around 2%. Finally, she highlighted that risks to economic growth continue to lean towards the downside.

Overall, the stagnant fundamentals of the euro area compared to the robust resilience of the US economy bolster the notion of a stronger Dollar in the medium-term horizon, especially given the possibility of both the ECB and the Fed initiating their easing programs nearly simultaneously. In such a scenario, EUR/USD could experience a more pronounced correction, initially targeting its year-to-date low around 1.0700 before potentially revisiting lows from late October 2023/early November in the 1.0500 region.

EUR/USD daily chart

EUR/USD short-term technical outlook

EUR/USD now faces an initial hurdle at the March high of 1.0942 (March 7) ahead of 1.0998 (January 11), all before the psychological barrier of 1.1000 and prior to the December 2023 top of 1.1139 (December 28).

On the downside, if the pair breaks below the 200-day SMA at 1.0831, it could then embark on a potential visit to the 2024 low of 1.0694 (February 14). Down from here emerges the November 2023 low of 1.0516 (November 1) closely followed by the weekly low of 1.0495 (October 13, 2023), the 2023 low of 1.0448 (October 3) and the round level of 1.0400.

In the meantime, as long as the EUR/USD remains above its 200-day Simple Moving Average (SMA) of 1.0831, the outlook is favourable.

Looking at the 4-hour chart, the pair appears to have cleared the way for more increases in the near term. That being stated, the next upward hurdle appears at 1.0942, followed by 1.0998. The earliest level of support is 1.0796, followed by 1.0761, 1.0732, and 1.0694. The Moving Average Convergence Divergence (MACD) stayed positive, and the Relative Strength Index (RSI) increased over 66.