EUR/USD Forecast: Euro needs to reclaim 0.9700 to extend correction

EUR/USD has managed to stage a rebound after having touched its weakest level since July 2002 at 0.9569 in the Asian session. The pair was last seen trading below 0.9700 and it needs to flip that resistance into support in order to discourage bears.

The dollar rally that started on upbeat PMI figures from the US late Friday gathered momentum at the beginning of the week and the DXY climbed above 114.00 for the first time since May 2002. The risk-averse market environment and the British pound's collapse allowed the greenback to continue to outperform its major rivals as the safer alternative.

Meanwhile, some hawkish comments from European Central Bank officials seem to be helping the euro show some resilience. Late Friday, ECB Governing Council member and German central bank head Joachim Nagel argued that they need to halt bond purchases once their job is down and reiterated that the policy rate must continue to rise. Earlier in the day, ECB Vice President Luis de Guindos said that they are fully committed to the 2% inflation target and added that the size of rate hikes will depend on incoming data.

On a negative note, the headline German IFO Business Climate Index fell to 84.3 in September from 88.5 in August, compared to the market expectation of 87.1. Commenting on the data, an IFO economist told Reuters that the German economy is facing a recession with retail business expectations slumping to historic lows. 

Later in the day, ECB President Christine Lagarde and policymaker Mario Centeno will be delivering speeches. Hawkish remarks are likely to continue to help the euro hold its ground in the short term. The US economic docket will feature the Chicago Fed's National Activity Index and the Dallas Fed's Texas Manufacturing Survey. Atlanta Fed President Raphael Bostic, Cleveland Fed President Loretta Mester and Dallas Fed President Lorie Logan are scheduled to speak during the American trading hours.

EUR/USD Technical Analysis

Despite the latest rebound, the Relative Strength Index (RSI indicator on the four-hour chart stays below 30, suggesting that there is more room on the upside before EUR/USD corrects its oversold conditions. Meanwhile, the pair holds above the one-week-old descending regression channel.

In case EUR/USD rises above 0.9700 (psychological level, static level) and starts using that level as support, it could extend its recovery toward 0.9750 (static level) 0.9775 (20-period SMA) and 0.9800 (psychological level, static level).

On the downside, 0.9665 (upper-limit od the descending channel) aligns as immediate support. If the pair returns within the descending channel, it could fall toward 0.9600 (psychological level, mid-point of the descending channel) and 0.9570 (daily low).