EUR/USD Forecast: Euro needs risk mood to improve for a rebound

EUR/USD extends its slide to a fresh two-month low.
Near-term technical outlook suggests that the pair could stage a correction.
A positive shift in risk mood could help the Euro find demand.

Eren Sengezer FXStreet

EUR/USD has managed to recover modestly after having touched its weakest level in two months below 1.0720. The pair's near-term technical outlook points to oversold conditions but the Euro could have a difficult time outperforming the US Dollar (USD) unless there is a noticeable improvement in market mood.

The risk-averse market atmosphere amid a lack of progress in the US debt-ceiling negotiations provided a boost to the USD mid-week. Additionally, hawkish comments from Federal Reserve (Fed) Governor Christopher Waller caused investors to reassess the possibility of the Fed leaving its policy rate unchanged in June.

According to the CME Group FedWatch Tool, markets are currently pricing in a nearly 40% probability of one more rate hike in June, compared to less than 20% earlier in the week. Waller reiterated on Wednesday that fighting inflation continues to be his priority and noted that he would not support stopping rate increases unless there was clear evidence that inflation was moving toward the Fed's objective of 2%.

Early Thursday, the Euro Stoxx 50 Index trades modestly higher on the day. US stock index futures, on the other hand, point to a mixed opening. S&P Futures are up 0.5% but Dow Futures are down 0.3%. In case there is a risk rally after Wall Street's opening bell, the USD could lose interest and open the door for a rebound in EUR/USD and vice versa.

The US economic docket will feature the first-quarter Gross Domestic Product growth. Since this data will be a revision, it is unlikely to trigger a significant market reaction. Investors will also pay close attention to the weekly Initial Jobless Claims data. In case the number of first time application for unemployment benefits rises significantly, by 20K or more, the USD could come under renewed selling pressure.

EUR/USD Technical Analysis

The Relative Strength Index (RSI) indicator on the four-hour chart dropped into the oversold territory below 30 on Thursday. Additionally, EUR/USD manages to hold slightly above the mid-point of the descending regression channel coming from early May. The upper-limit of the channel forms first resistance at 1.0750 ahead of 1.0770 (static level, 20-period Simple Moving Average (SMA)) and 1.0800 (Fibonacci 50% retracement of the latest uptrend, 50-period SMA).

On the downside, 1.0700 (psychological level) aligns as next support ahead of 1.0670 (lower-limit of the channel descending channel, static level from February).

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Author

Eren Sengezer

FXStreet

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

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