EUR/USD Forecast: Buy the dip? Fed dovishness and plunging EU covid cases point to fresh highs

EUR/USD has been retreating from the highs as recovering US yields support the dollar.
The Fed's dovish messages – on top of disappointing data – and the EU's improving situation point higher.
Tuesday's four-hour chart implies further gains for the currency pair.

Yohay Elam FXStreet

Countertrend or only a correction? That is the question for EUR/USD traders as the world's most popular currency pair has retreated from the highest levels since January. The answer is probably the latter. There are several reasons to expect further gains

First, there is nothing to indicate that the slide in the dollar has come to an end. Federal Reserve officials have reiterated their message that rising inflation is probably transitory and that the economy still has a long way to go. The latest to support this view was Charles Evans and Randal Quarles – the latter is a permanent voter and is set to speak again on Wednesday.

The background for these comments is a duo of disappointing figures. The Conference Board's Consumer Confidence measure for May came out at 117.2 points, short of expectations. That shows the recovery is bumpy. The housing sector is also suffering jitters, as New Home Sales statistics for April have shown – an annualized level of only 863,000, below March's record.

Secondly, in the old continent, there are reasons to be cheerful. Coronavirus cases are falling sharply, showing that the accelerating vaccination campaign is bearing fruit. Another ramp-up in immunization is expected in June, as the summer tourism season begins, providing additional hopes for recovery.

Source: FT

What could stop the rally? Perhaps concerns from the European Central Bank on the increase in the exchange rate would could down the enthusiasm, but that would have to wait for the ECB's next meeting on June 10.

In the US, better economic data would support the dollar, and perhaps that could come on Thursday. However, the calendar on Wednesday is light, leaving the Fed doves to weigh on the greenback.

For Thursday: US Durable Goods Orders April Preview: Jobs should equal spending

EUR/USD Technical Analysis

Euro/dollar is trending higher, as the four-hour chart shows. After breaking above the touch triple top at 1.2245, it reached a new high of 1.2266. Momentum remains to the upside and the Relative Strength Index (RSI) is below 70, thus outside overbought conditions. Bulls are in control.

Above 1.2266, the next levels to watch are 1.2280 and 1.2350, both dating back to the turn of the year.

Support is at round 1.22, followed by 1.2175 and 1.2155 – all were stepping stones on the way up.

Author

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

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