EUR/USD Forecast: ECB-Fed policy divergence could lift Euro

• EUR/USD has continued to stretch higher following Wednesday's upsurge.
• The US Dollar struggles to find pressured by dovish Fed bets.
• ECB is expected to raise key rates by 25 basis points (bps).

EUR/USD gathered bullish momentum and registered its highest daily close in over a year above 1.1050 on Wednesday. The pair has continued to stretch higher toward 1.1100 early Thursday before going into a consolidation phase. The European Central Bank (ECB) will announce its policy decisions later in the day and the pair could extend its rally in case the ECB's outlook highlights a widening policy divergence with the US Federal Reserve (Fed).

On Wednesday, the Fed announced that it raised the policy rate by 25 basis points (bps) to the range of 5-5.25% as expected. In the policy statement, the Fed scrapped the language saying that it "anticipates" further rate increases would be needed. During the post-meeting press conference, FOMC Chairman Jerome Powell refrained from committing to a pause in rate hikes in June and said that they were not planning to cut rates this year. Powell's comments, however, failed to convince markets and the CME Group FedWatch Tool shows that the probability of another rate hike in June is virtually 0.

The ECB is forecast to raise its key rates by 25 bps. During the month of April, several ECB policymakers noted that they could opt for another 50 bps hike in May but developments since then caused markets to lean toward a smaller rate increase. Earlier this week, the ECB's Bank Lending Survey revealed the negative impact of high rates on credit demand. 

A 50 bps rate hike, which is very unlikely at this moment, would be a significant hawkish surprise and provide a boost to EUR/USD. In case the ECB opts for a 25 bps hike but confirms that they will continue to raise rates in the near future, that should also help the Euro outperform the USD. 

On the other hand, the Euro could come under pressure and EUR/USD could stage a deep correction in case the ECB refrains from committing to another rate increase at the next meeting.

Market participants will also pay close attention to the weekly Initial Jobless Claims and the first-quarter Unit Labor Costs data from the US. A big decline in jobless claims alongside a strong wage inflation reading could help the US Dollar find its footing in the short term and limit EUR/USD's upside.

EUR/USD Technical Analysis

EUR/USD faces initial resistance at 1.1100 (psychological level, static level, mid-point of the ascending regression channel). Once the pair rises above that level and confirms it as support, it could target 1.1160 (static level from March 2022) and 1.1200 (psychological level, static level).

On the downside, 1.1050 (former resistance, static level) aligns as interim support before 1.1025 (lower-limit of the ascending regression channel, 50-period Simple Moving Average (SMA)) and 1.1000 (100-period SMA; psychological level).