EUR/USD Forecast: Euro faces several key hurdles before parity

EUR/USD has preserved its bullish momentum following Monday's positive closing and touched its highest level since September 22 near 0.9900 early Tuesday. The pair could stretch higher in case risk flows continue to dominate the financial markets but it is likely to face several strong resistances before targeting parity.

The broad-based selling pressure surrounding the greenback provided a boost to EUR/USD in the second half of the day on Monday.

The data published by the ISM showed that the business activity in the manufacturing sector continued to expand at a modest pace in September. Underlying details of the report revealed that sectoral employment contracted and input price pressures continued to ease, causing markets to scale back hawkish Fed bets.

According to the CME Group FedWatch Tool, the probability of a 75 basis points rate hike in September stands at 50%, compared to 62.5% last week. The US Dollar Index is down nearly 1% since the beginning of the week.

Meanwhile, European Economic Commissioner Paolo Gentiloni and Internal Market Commissioner Thierry Breton called for joint EU borrowing to deal with the energy crisis on Tuesday. Officials suggested that the new borrowing programme could be based on the debt issuance during the coronavirus pandemic to subsidies jobs. On the other hand, German Finance Minister Christian Lindner voiced his opposition by arguing that joint EU debt would not help them to strengthen competitiveness in the long run. It's too early to say what kind of an impact such a decision would have on the European Central Bank's policy outlook but investors are likely to pay close attention to fresh developments on that matter.

In the second half of the day, JOLTS Job Opening and Factory Orders data for August will be featured in the US economic docket. As of writing, US stock index futures were up between 1.3% and 1.8%. Unless these data force investors to seek refuge, the dollar is likely to stay on the backfoot in the second half of the day with an extended rally in Wall Street's main indexes.

EUR/USD Technical Analysis

The Relative Strength Index (RSI) indicator on the four-hour chart is yet to rise above 70, suggesting that EUR/USD has more room on the upside before turning technically overbought. Furthermore, the last four-hour candle closed above the 100-period SMA, confirming the bullish bias.

0.9900 (psychological level) aligns as initial resistance for EUR/USD. In case buyers manage to flip that level into support, the pair still needs to clear 0.9930 (200-period SMA) and 0.9950 (former support, static level) hurdles before aiming for parity.

On the downside, 0.9850 (Fibonacci 61.8% retracement of the latest downtrend, 100-period SMA) form key support ahead of 0.9800 (psychological level, Fibonacci 50% retracement) and 0.9750 (Fibonacci 38.2% retracement, 50-period SMA).