EUR/USD Forecast: Euro could extend rebound if ECB downplays market jitters

EUR/USD has gathered recovery momentum and advanced beyond 1.0600 early Thursday after having suffered heavy losses on Wednesday. The European Central Bank's (ECB) policy announcements and its approach to market turmoil could drive the Euro's valuation in the second half of the day.

Flight to safety intensified on Wednesday as news of Credit Suisse's inability to receive additional financial support from Saudi National Bank revived fears over the financial crisis spreading to Europe. EUR/USD stayed under constant bearish pressure throughout the day and touched its lowest level since early January at 1.0515.

In the late American session, however, the Swiss National Bank (SNB) and the Swiss Financial Market Supervisory Authority (FINMA) said in a statement that Credit Suisse met the capital requirements in case it needed to raise liquidity. In turn, EUR/USD managed to erase a small portion of its daily losses before the end of the day and extended its rebound during the Asian trading hours on Thursday.

Reflecting the improving market mood, Euro Stoxx 50 Index opened nearly 2% higher following Wednesday's 3.5% decline.

Later in the day, the European Central Bank (ECB) is expected to raise its key rates by 50 basis points. Earlier in the week, several news outlets reported that dovish ECB policymakers were going to argue that the changing economic environment would warrant more caution in regard to aggressive policy tightening.

In case the ECB says that it can change its approach to policy tightening if it sees additional signs of stress in financial conditions in the Eurozone, the Euro is likely to have a hard time finding demand. On the flip side, the bank could downplay market jitters and note that it was an isolated event that is unlikely to occur again, markets are likely to expect additional big rate hikes. In that scenario, EUR/USD is likely to remain bullish and extend its rebound.

If the ECB surprises the markets by opting for a 25 bps hike, that is likely to trigger an intense selloff in the Euro, at least with the immediate reaction.

EUR/USD Technical Analysis

EUR/USD was last seen trading in 1.0620/30 area, where the 50-period and the 10-period Simple Moving Averages (SMA) align. In case the pair stabilizes above that region, it could face interim resistance at 1.0660 (static level) before targeting 1.0690/1.0700 area (200-period SMA, psychological level, static level).

On the downside, first support is located at 1.0600 (psychological level, static level) ahead of 1.0530 (static level= and 1.0500 (psychological level).