EUR/USD Forecast: Euro could extend correction on safe-haven flows

EUR/USD has managed to build on last week's gains early Monday and reached its highest level since June 28 above 1.0580. The pair seems to have gone into a consolidation phase in the European morning but the technical outlook suggests that buyers look to retain control of the action. Nevertheless, in case safe-haven flows start to dominate the financial markets in the second half of the day, the US Dollar could gather strength and not allow the pair to continue to push higher.

On Friday, the data published by the US Bureau of Labor Statistics revealed that Nonfarm Payrolls rose by 263,000 in November, surpassing the market expectation of 200,000 by a wide margin. Although this reading provided a boost to the US Dollar with the initial reaction, it failed to influence how markets price the Federal Reserve's next policy move. According to the CME Group FedWatch Tool, there is an 82% probability of a 50 basis points rate hike in December. In turn, the 10-year US Treasury bond yield dropped below 3.5% for the first time since late September and didn't allow the US Dollar to end the week on a strong note.

The improving market mood put additional weight on the US Dollar and helped EUR/USD gain traction. Major Asian equity indexes pushed higher to start the week on reports of several Chinese cities easing coronavirus restrictions. Nevertheless, the US stock index futures trade in negative territory in the early European session. In case Wall Street's main indexes open lower and stay under bearish pressure, EUR/USD could extend its downward correction in the second half of the day.

The US economic docket will feature the ISM's Services PMI survey for November. Last week, the US Dollar weakened against its rivals after ISM's Manufacturing PMI came in below 50. The headline Services PMI is expected to improve to 55.6 from 54.4 in October. a disappointing PMI print is likely to make it difficult for the US Dollar to find demand. More importantly, market participants will pay close attention to the Prices Paid Index. The inflation component is forecast to rise to 73.6 from 70.7, revealing an increase in the service sector's input price inflation at an accelerating pace. An unexpected decline in this sub-index could put additional weight on the US Dollar's shoulders and vice versa.

EUR/USD Technical Analysis

The Relative Strength Index (RSI) indicator on the four-hour chart edged lower toward 60, suggesting that EUR/USD's modest decline witnessed in the last four-hour candle is a technical correction. On the downside, 1.0540 (static level, former resistance) aligns as interim support ahead of 1.0500 (psychological level, static level). A four-hour close below the latter could be seen as a significant bearish development and open the door for a test of the 20-period Simple Moving Average (SMA) at 1.0470.

Interim resistance seems to have formed at 1.0580 ahead of 1.0600 (psychological level). In case buyers manage to lift the pair above 1.0600, 1.0630 (static level from June) could be seen as the next hurdle.