EUR/USD Forecast: Downside risk persists despite the overnight bullish move

A combination of factors assisted the EUR/USD pair to gain some meaningful traction on the first day of a new trading week and rally to two-week tops. The US drugmaker Moderna reported positive results for its potential COVID-19 vaccine on Monday. Encouraging data on coronavirus vaccine trial triggered a fresh wave of the global risk-on trade. The upbeat market mood, in turn, dampened safe-haven demand for the greenback and turned out to be one of the key factors behind the pair's sudden spike during the second half of the overnight trading action.

The shared currency got an additional boost after France and Germany proposed a €500 billion European recovery fund to be distributed to EU countries worst affected by the virus outbreak. Both the French President Emmanuel Macron and German Chancellor Angela Merkel agreed that the funds should be provided as grants. The update comes amid hopes for additional stimulus by European Central Bank and provided an additional boost to the global risk sentiment. The pair rallied over 125 pips and jumped back above the 1.0900 round-figure mark, albeit lacked any strong follow-through.

Growing fears about the second wave of the coronavirus infections and worsening US-China relations kept a lid on the latest optimism. This was evident from a cautious mood around the global equity markets and led to the pair's subdued/consolidative price action through the Asian session on Tuesday. Market participants now look forward to the release of the forward-looking German ZEW survey on economic sentiment for May. Later during the early North American session, the US housing market data – Building Permits and Housing Starts – might influence the USD price dynamics and produce some meaningful trading opportunities.

Short-term technical outlook

From a technical perspective, the pair managed to move past the 1.0875 short-term pivotal resistance (200-period SMA on the 4-hourly chart). Despite the positive move, the pair remains well within a broader trading range held over the past seven weeks or so. The set-up warrants some caution before placing any aggressive bullish bets, instead suggests that the downside risk still persists.

In the meantime, any subsequent appreciating move is likely to confront immediate resistance near the 1.0945-50 region. Above the mentioned barrier, the pair is likely to aim to challenge the top end of the mentioned trading range, around the key 1.10 psychological mark. This is closely followed by the very important 200-day SMA, near the 1.1015-20 region, which if cleared might trigger a near-term short-covering rally. The pair might then accelerate the momentum further towards reclaiming the 1.1100 round-figure mark en-route the 1.1145-50 supply zone.

On the flip side, immediate support is now pegged near mid-1.0800s. Some follow-through weakness has the potential to drag the pair further towards the 1.0800 mark en-route the trading range support near the 1.0775 area. A convincing breakthrough will set the stage for the resumption of the pair's prior bearish trend and turn the pair vulnerable to break below the 1.0700 mark. Bears might eventually aim towards challenging YTD lows support around the 1.0635 region.