EUR/USD Forecast: ECB-Fed policy divergence plays in favor of Euro

EUR/USD has extended its weekly rally during the Asian trading hours on Thursday and climbed above 1.0900. The near-term technical picture points to overbought conditions for the pair, suggesting that there could be a downward correction before it can resume its uptrend.

The dovish change witnessed in the US Federal Reserve's language triggered a selloff in the US Dollar in the late American session on Wednesday and fueled EUR/USD's rally. 

The Fed said that some "additional policy firming" may be appropriate instead of calling for "ongoing increases" in rates. Additionally, the revised Summary of Economic Projections revealed that the terminal rate projection stood unchanged at 5.1%. 

During the press conference, FOMC Chairman Jerome Powell explained that tightening financial conditions would allow them to do less monetary tightening. Although Powell repeated that they were not forecasting a rate cut in 2023 and noted that they haven't discussed any changes to the balance sheet reduction strategy, US T-bond yields fell sharply, reflecting the dovish expectations.

On the other hand, "If inflation develops as projected, further interest rate hikes have to follow in upcoming meetings," European Central Bank policymaker Joachim Nagel said on Wednesday. "We have to tame inflation, and to do so, we have to be bold and decisive. In my view, our job is not done yet."

The impact of the Silicon Valley Bank and Credit Suisse turmoil on financing conditions is likely to be felt more strongly in the US than in Europe. Hence, the ECB could be more willing to raise its policy rate to battle inflation than the Fed, highlighting a possible divergence in policy. 

In the second half of the day, the weekly Initial Jobless Claims and February New Home Sales will be featured in the US economic docket. Eurostat will release the preliminary Consumer Confidence data for March as well. These data are unlikely to trigger a noticeable market reaction. 

EUR/USD Technical Analysis

The Relative Strength Index (RSI) indicator on the four-hour chart holds above 70 and EUR/USD is trading near the upper limit of the Bollinger Band, pointing to overbought conditions.

In case the pair stages a technical correction, 1.0850 (former resistance, static level) aligns as first support before, 1.0800 (psychological level, static level, mid-point of the Bollinger Band).

On the upside, additional gains toward 1.0930 (static level from January) and 1.1000 (psychological level, static level) could be seen once EUR/USD stabilizes above 1.0900 and confirms that level as support.