EUR/USD Forecast: Euro looks to stretch higher as ECB instills confidence in banking

EUR/USD has gathered bullish momentum after the European Central Bank's (ECB) policy announcements on Thursday and continued to stretch higher toward 1.0700 early Friday. The improving risk sentiment could help the pair keep its footing ahead of the weekend and the technical outlook suggests that sellers remain on the sidelines for the time being.

As expected, the ECB hiked its key rates by 50 basis points (bps) on Thursday. At the beginning of the policy statement, the bank acknowledged the elevated uncertainty, saying that it reinforces the ECB's data-dependent approach to policy decisions. 

During the press conference, ECB President Christine Lagarde and Vice President Luis de Guindos both reassured markets that they have tools to address a potential liquidity crisis and noted that banks were resilient in the Eurozone.

Although Lagarde refrained from signalling one more big rate hike at the next meeting, the positive shift witnessed in markets helped EUR/USD gain traction. 

Meanwhile, several ECB policymakers voiced support for additional rate hikes in the near term. “I still believe that yesterday was not the last rate hike,” Governing Council member Gediminas Šimkus said and policymaker Peter Kazimir reiterated that the need to continue with rate hikes with core inflation remaining sticky.

Following Thursday's 2% jump, the Euro Stoxx 50 opened with a bullish gap on Friday, suggesting that risk flows continue to dominate the markets ahead of the weekend. 

Later in the day, Industrial Production data for February and the University of Michigan's flash Consumer Sentiment Survey for March will be featured in the US economic docket. Following this week's highly volatile action, these data releases are unlikely to have a significant impact on the US Dollar's valuation. Instead, market participants will pay close attention to risk perception. If Wall Street's main indexes manage to build on Thursday's strong gains, EUR/USD could preserve its bullish momentum toward the end of the week.

EUR/USD Technical Analysis

EUR/USD retreated below 1.0660 (static level) after having tested that level in the early European morning. Slightly above that hurdle, 1.0680 (200-period Simple Moving Average on the four-hour chart) aligns as the next resistance. With a four-hour close above 1.0680, the pair could target 1.0700 (psychological level) and 1.0730 (static level).

On the downside, first support is located at  1.0620/30 area, where the 50-period and the 10-period SMAs align. In case the pair breaks below that region, additional losses toward 1.0600 (psychological level, static level) and 1.0530 (static level) could be witnessed.