EUR/USD Forecast: ECB sends speculative interest back into the USD

EUR/USD Current Price: 1.0919

• The European Central Bank hiked rates by 50 bps, hawkish Lagarde failed to impress.
• The US Nonfarm Payrolls report will be the last first-tier event of the week.
• EUR/USD trims Fed-inspired gains and aims to break below 1.0900.

The EUR/USD pair peaked at 1.1032 early Thursday, as the US Dollar extended the Fed-inspired slump during Asian trading hours. The pair changed course ahead of the European Central Bank (ECB) monetary policy decision, plummeting to 1.0884. The pair finally stabilized in the 1.0920 zone, where it stands ahead of Friday’s opening. The US Dollar advanced across the FX board, benefiting from the unimpressive ECB and Bank of England (BoE) decisions, as the latter also unveiled its monetary policy stance during European trading hours.

The ECB raised its key rates by 50 basis points (bps) each, as expected. It also anticipated another 50 bps hike in March while noting that subsequent actions will be evaluated meeting by meeting and will be data-dependent. President Christine Lagarde offered some hawkish headlines in the following press conference, as she noted the central bank has ground to cover and that they have not yet reached a peak in rates. Additionally, she noted that in all “reasonable scenarios,” significant hikes are needed as she does not believe the disinflationary process has begun. Still, as the market believes the March hike could be the last, investors rushed to sell the Euro.

Earlier in the day, the BoE increased its benchmark rate by 50 bps, meeting the market expectations, but offered quite an optimistic view, as policymakers said inflation may have peaked and anticipated a shallower-than-feared recession. The decision provided additional support to the US Dollar.

Friday will bring the United States Nonfarm Payrolls report. The US is expected to have added 185K new jobs in January, while the unemployment rate is foreseen at 3.6%, up from the previous 3.5%. Ahead of the employment figures, S&P Global will release the final readings of the January Services PMIs. The US will also release the ISM Services PMI for the same month, foreseen at 50.3 from 49.6 in December.

EUR/USD short-term technical outlook

From a technical point of view, the daily chart for the EUR/USD pair shows that bulls have lost conviction, but there are no signs of substantial selling interest. The pair keeps developing above a firmly bullish 20 Simple Moving Average (SMA), which provides dynamic support at around 1.0835. At the same time, the 100 SMA is about to cross above the 200 SMA in the 1.300/10 price zone. On the other hand, technical indicators turned lower, with the Momentum lacking enough strength at around its 100 level and the Relative Strength Index (RSI) retreating from overbought readings and still far above its midline.

The near-term picture skews the risk to the downside, although another leg south is not yet confirmed. The pair is barely holding above a flat 20 SMA, while the longer ones maintain their modest bullish slopes above the longer ones. Technical indicators, in the meantime, retreated sharply from overbought readings, although the Momentum indicator holds above its midline. Nevertheless, the RSI has crossed its midline with a firmly bearish slope, in line with a steeper decline in the near term.  

Support levels: 1.0895 1.0850 1.0800

Resistance levels:  1.0930 1.0980 1.1030

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