EUR/USD Forecast: Euro needs to reclaim 0.9880 to extend rebound

After having touched its lowest level since October 2002 at 0.9809 earlier in the day, EUR/USD has staged a rebound in the European session and turned positive on the day above 0.9850. In case the pair reclaims 0.9880 and starts using that level as support, it could extend its recovery in the near term.

The US Federal Reserve raised its policy rate by 75 basis points (bps) as expected on Wednesday. The dot plot revealed that policymakers project the terminal rate to be at 4.6% in 2023, compared to 3.8% in June's Summary of Economic Projections. During the press conference, FOMC Chairman Jerome Powell said that there was no "painless way" to bring inflation down and added that a delay in lowering inflation would only lead to more pain. Boosted by the hawkish policy outlook seen in the dot plot and Powell's remarks, the US Dollar Index reached its highest level in two decades at 111.80 during the Asian session on Thursday.

The improving market mood, however, seems to be making it difficult for the dollar to preserve its strength. Additionally, the sharp upsurge witnessed in the EUR/CHF pair following the Swiss National Bank's decision to hike its policy rate by 75 bps, rather than the market speculation of 100 bps, suggests that the euro is capturing some of the outflows out of the Swiss franc.

In the second half of the day, the US economic docket will feature the weekly Initial Jobless Claims data, which is likely to be ignored by market participants. US stock index futures are trading in positive territory during the European session. In case Wall Street's main indexes gain traction after the opening bell, the dollar could deepen its downward correction and allow EUR/USD to continue to stretch higher.

EUR/USD Technical Analysis

0.9880 (former support, static level) forms initial resistance. If EUR/USD manages to rise above that level and starts using it as support, it could target 0.9900 (psychological level), 0.9950 (static level, 20-period SMA on the four-hour chart) and 0.9980 (100-period SMA).

On the downside, 0.9800 (psychological level, static level) aligns as first support ahead of 0.9750 (static level from October 2002) and 0.9700 (psychological level).