EUR/USD Forecast: Buyers welcome inflation data, policymakers' dovishness

EUR/USD Current Price: 1.0843

• The US Dollar entered sell-off mode as US inflation eases, policymakers turn dovish.
• The US January Michigan Consumer Sentiment Index is expected to have improved to 60.5.
• EUR/USD is extremely overbought in the near term, but buying interest remains strong.

The EUR/USD pair surged to 1.0866 on Thursday, its highest since April 2022, holding near the level ahead of the Asian opening. Financial markets woke up with the release of the US Consumer Price Index (CPI) as the annual inflation rate came at 6.5% as expected in December, in line with market expectations. It also matched speculation that the US Federal Reserve (Fed) will no longer need to aggressively tighten its monetary policy.  

In fact, the US Dollar was under selling pressure ahead of the release, as market participants were looking for an excuse to keep selling the Greenback. Encouraging inflation figures initially made investors doubt how those would affect the future central bank monetary policy decisions, but The Federal Reserve Bank of Philadelphia President Patrick Harker came to aid Euro buyers.

Among other things, Harker said that “the worst of the inflation spike is likely past now,” adding that the time of super-sized rate hikes has passed, and it’s time to switch to 25 basis points (bps) increments. Speculative interest rushed to price in two more rate hikes of 25 bps each in February and March before pausing and holding.

Alongside inflation figures, the United States released Initial Jobless Claims for the week ended January 6,  which were up by 205K, better than the 215K expected.

On Friday, Germany will unveil Real GDP Growth, while the Euro Zone will release November Industrial Production and the Trade Balance for the same month. In the US, the focus will be on the preliminary estimate of the January Michigan Consumer Sentiment Index, foreseen at 60.5 after printing at 59.7 in December.

EUR/USD short-term technical outlook

The EUR/USD pair is ending the day with substantial gains and well above the 61.8% retracement of the 2020 yearly slide at 1.0745, offering a convincing sign of a bullish continuation. Technical indicators head firmly north within positive levels, with the Relative Strength Index (RSI) approaching overbought readings. Meanwhile, EUR/USD develops well above a bullish 20 Simple Moving Average (SMA), while the longer ones aim higher with uneven strength below the shorter one.

Technical readings in the 4-hour chart support the bullish case, as an ascending 20 SMA continues to provide intraday support and attract strong buying interest while currently rising above the mentioned Fibonacci support. The Momentum indicator advances within positive levels, while the RSI is barely losing its positive momentum around 80.

 Support levels: 1.0815 1.0760 1.0720

Resistance levels: 1.0890 1.0940 1.0985

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