EUR/USD Forecast: Consolidation likely, bias remains bearish

A stronger US dollar pushed EUR/USD toward 1.1100, as the pair suffered its second consecutive daily decline and its worst daily loss in a month. Despite the retreat, the trend for the pair is still upward, but short-term momentum has turned in favor of the Dollar as market participants turn their attention toward next week's Federal Reserve (Fed) and European Central Bank (ECB) meetings.

Data released on Thursday showed that consumer sentiment improved modestly in July in the Euro area, with the index edging higher to -15.1 from -16.1 in June. The German Producer Price Index dropped 0.3% in June, with the annual rate falling from 1% to 0.1%. Next week, the European Central Bank is expected to raise rates by 25 basis points, and the interest rate market shows the odds of another 25 bps hike in September near 60%. What the ECB says will be key.

In the US, data showed that Initial Jobless Claims totaled 228K in the week ended July 15, the lowest reading since mid-May. This number suggests that the labor market remains tight. As a consequence, US yields jumped, boosting the US dollar. Other reports came in mixed, with the Philly Fed rising marginally from -13.7 in June to -13.5 in July, below the market consensus of -10, while Existing Home Sales dropped to 4.16 million (annual rate), below the estimated 4.2 million.

The US Dollar rose across the board and pushed EUR/USD to the downside, while bond yields rose across both sides of the Atlantic. The Treasury yield curve reached fresh weekly highs as the market anticipates a rate hike next week from the Federal Reserve and continues to evaluate the likelihood of another hike before year-end.

EUR/USD short-term technical outlook

Technical indicators have turned to the downside in the daily chart. The Relative Strength Index (RSI) broke below 70 and is showing a negative inclination, while momentum remains above midlines but has turned to the downside. On the positive side for the Euro, the price remains above key moving averages and above the 1.1080 key support level. While above 1.0900, the main bias is to the upside.

On the 4-hour chart, the pair is staging a bearish correction. According to technical indicators, this could continue; however, the Relative Strength Index (RSI) is approaching 70 and momentum is flattening. The price is well below the 20-Simple Moving Average (SMA), which stands at 1.1215. Slightly above 1.1100 is the 38.2% Fibonacci retracement level, so that area could prompt a rebound, while the next support level stands at 1.1080. 

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