EUR/USD Forecast: Euro likely to hold its ground ahead of ECB

EUR/USD has gone into a consolidation phase slightly below 1.0750 early Wednesday after having managed to close above 1.0700 for the second straight day on Tuesday. The pair's near-term technical outlook points to a bullish bias but the trading action could remain subdued ahead of the European Central Bank's (ECB) policy announcements on Thursday.

On Tuesday, the data from the US showed that the annual inflation, as measured by the Consumer Price Index (CPI), declined to 6% in February from 6.4% in January as expected. More importantly, the Core CPI, which excludes volatile food and energy prices, rose 0.5% on a monthly basis, surpassing the market consensus and January's print of 0.4%. 

With fears over a deepening financial crisis easing and inflation remaining sticky, investors started to re-price a 25 basis points Federal Reserve rate hike at the upcoming policy meeting. In turn, the US Treasury bond yields gained traction and the US Dollar (USD) held resilient against its major rivals.

In the second half of the day, February Producer Price Index (PPI) and Retail Sales data will be featured in the US economic docket. The CME Group FedWatch Tool shows that markets currently see a more-than-80% probability of a 25 bps rate increase next week. These data releases are unlikely to have a significant impact on the market positioning. 

Hence, the risk perception could drive the USD's performance in the second half of the day. If Wall Street's main indexes build on Tuesday's impressive gains after the opening bell, the USD is likely to have a hard time finding demand and vice versa.

Meanwhile, Reuters reported on Wednesday that ECB policymakers are leaning toward a 50 basis points (bps) rate hike amid uncomfortably high inflation in the Eurozone. They also reportedly don't want to lose credibility after having repeatedly signalled that a bigger rate hike was coming in March.

As markets are gearing up for the ECB's policy decisions, they are unlikely to bet on a significant Euro weakness, helping the pair hold its ground in the near term.

EUR/USD Technical Analysis

EUR/USD's action on Tuesday confirmed that static resistance area have formed at 1.0750/60. A four-hour close above that hurdle could open the door for a leg higher toward 1.0800 (psychological level, static level) and 1.0850 (static level from January).

On the downside, 1.0700 (static level, psychological level, 200-period Simple Moving Average (SMA) on the four-hour chart) aligns as key support. If that level fails, sellers could show interest and drag EUR/USD down to 1.0640 (50-period SMA) and 1.0620 (100-period SMA).