EUR/USD Forecast: Euro needs to capture 0.9740 to extend rebound

EUR/USD has turned south and declined below 0.9700 early Thursday after having gained more than 100 pips on Wednesday. In order to extend its recovery, the pair needs to rise above 0.9740 and start using that level as support.

The broad-based selling pressure surrounding the greenback helped EUR/USD gain traction on Wednesday. The positive shift witnessed in market sentiment weighed on the dollar and the pair managed to stretch higher during the American trading hours. Safe-haven flows, however, started to dominate the market on Thursday, suggesting that yesterday's market action was an overdue correction. At the time of press, US stock index futures were down between 1.1% and 1.3%, pointing to a risk-averse market atmosphere.

Meanwhile, several European Central Bank (ECB) policymakers noted that they are leaning toward a 75 basis point hike in rates in October, allowing the shared currency to stay resilient against its rivals. ECB Governing Council members Robert Holzmann and Gediminas Simkus both said that a 75 bps increase in rates at the next policy meeting would be appropriate. On a dovish note, policymaker Mario Centeno argued that a faster increase in rates than warranted may backfire and added that he was not observing a deanchoring of inflation expectations in the euro area. 

Investors expect the annual Harmonised Index of Consumer Prices (HICP) in Germany to rise to 10% in September from 8.8% in August. A strong inflation reading in Germany should help the euro hold its ground and vice versa.

In the second half of the day, the US Bureau of Economic Analysis will release its final estimate for the annualized Gross Domestic Product (GDP) growth for the second quarter. Unless there is a significant revision to the GDP reading, markets are likely to ignore that data. 

Market participants will keep a close eye on US stocks and if Wall Street's main indexes suffer heavy losses after the opening bell, the dollar could preserve its strength and make it difficult for EUR/USD to shake off the bearish pressure.

EUR/USD Technical Analysis

The Relative Strength Index (RSI) indicator on the four-hour chart stays near 50 and EUR/USD trades slightly above the 20-period SMA, which is currently located at 0.9635. As long as this level stays intact, the pair could try to stage another rebound. On the upside, 0.9670 (Fibonacci 23.6% retracement of the latest downtrend) aligns as immediate resistance before 0.9700 (psychological level) and 0.9740 (Fibonacci 38.2% retracement). If the pair manages to stabilize above that last hurdle, sellers could move to the sidelines and open the door for additional gains.

0.9635 (20-period SMA) forms first support before 0.9600 (psychological level) and 0.9550 (static level, the end-point of the downtrend).