EUR/USD Forecast: Corrective pullback is likely to remain supported near 1.2130-25 area

The EUR/USD pair struggled to find acceptance above the 1.2300 mark and witnessed a sharp pullback of around 100 pips from 32-month tops on Thursday. The retracement lacked any obvious catalyst and was solely led by some profit-taking amid typical thin trading volumes on the last day of the year. That said, the underlying bearish sentiment surrounding the US dollar helped limit deeper losses and assisted the pair to find some support ahead of the 1.2200 level.

Investors have been betting on a strong global economic recovery in 2021. This, along with the likelihood of additional US financial aid package, remained supportive of the upbeat market mood and dragged the key USD Index to the lowest level since April 2018. The safe-haven greenback was further pressured by expectations that the Fed will keep interest rates lower for a longer period and failed to gain any respite from upbeat Initial Jobless Claims data.

According to the US Department of Labor (DOL), the number of Americans filing for unemployment-related benefits fell to 787K during the week ending December 26. This was well below the 833K expected and the last week's upwardly revised reading of 806K (803K reported previously). Meanwhile, the mass distribution of vaccines helped offset worries about the new faster-spreading variant of the coronavirus and kept the USD bulls on the defensive.

Nevertheless, the pair ended about 9% higher for the year and managed to regain some positive traction on the first trading day of 2021. The pair was last seen trading just below mid-1.2200s as market participants now look forward to the release of the final Eurozone/US Manufacturing PMI prints for a fresh impetus. Apart from this, the broader market risk sentiment will influence the USD price dynamics and produce some meaningful trading opportunities.

Short-term technical outlook

From a technical perspective, Thursday’s slide below a near two-week-old ascending trend-line support might be seen as the first sign of bullish exhaustion. This was preceded by the occurrence of a bearish RSI divergence on the daily chart and supports prospects for a deeper pullback. Hence, a subsequent slide below the 1.2200 mark, towards testing the 1.2130-25 congestion zone, now looks a distinct possibility. The slide, however, might still be seen as a buying opportunity, which, in turn, should help limit the downside.

On the flip side, bulls are likely to wait for a sustained strength beyond the 1.2300 mark before placing fresh bets. The pair might then prolong its recent strong bullish momentum and climb further to mid-1.2300s, above which bulls might aim to reclaim the 1.2400 mark for the first time since April 2018.