EUR/USD Forecast: Euro defines range while waiting for a catalyst

EUR/USD has gathered recovery momentum and climbed toward 1.0800 late Thursday but erased a large portion of its daily gains to close below 1.0750. The pair stays quiet and continues to fluctuate in a tight channel near Thursday's closing level. The technical outlook fails to provide a convincing directional clue on Friday as investors refrain from making large bets ahead of next week's key macroeconomic data releases.

The risk-positive market environment made it difficult for the US Dollar to find demand on Thursday. With the 2-year 10-year US T-bond yield curve inversion reaching its highest level in multiple decades, however, the US Dollar (USD) staged a rebound in the American session and forced EUR/USD to reverse its direction.

The market positioning suggests that investors are looking for the Federal Reserve to raise its policy rate  above 5% by May. The CME Group FedWatch Tool shows the probability of two more 25 basis points rate hikes in March and May currently stand slightly above 70%.

Early Friday, markets remain cautious with US stock index futures trading modestly lower on the day. Another bout of risk aversion could help the US Dollar stay resilient against its rivals ahead of the weekend and vice versa.

In the American session, the University of Michigan will release the preliminary Consumer Sentiment Survey for February. The headline Consumer Confidence Index is expected to tick higher to 65 from 64.9 in January.

Market participants will keep a close eye on the year-ahead inflation expectation component of the survey, which declined to 4% in January from 4.4% in December. An unexpected increase in that reading could provide a boost to the US Dollar and weigh on the pair. On the flip side, another decline in this component, which would mark the fifth straight one, should hurt the USD and open the door for a late rebound in the pair.

EUR/USD Technical Analysis

The Relative Strength Index (RSI) indicator on the four-hour chart edged higher toward 50 on Thursday but failed to climb above that level, reflecting buyers' hesitancy.

On the upside, key resistance area seems to have formed at 1.0760/70, where the Fibonacci 50% retracement level of the latest uptrend and the 200-period Simple Moving Average align. In case the pair stabilizes above that level, additional buyers could come into play and help EUR/USD push higher toward 1.0820 (Fibonacci 38.2% retracement, 50-period SMA) and 1.0840 (100-period SMA).

EUR/USD faces interim support at 1.0730 (20-period SMA) before 1.0700 (psychological level, Fibonacci 61.8% retracement). A four-hour close below the latter could trigger an extended decline toward 1.0645 (static level).