EUR/USD Forecast: Euro remains on track to test 1.0500

EUR/USD has gathered bullish momentum late Wednesday and extended its rally early Thursday. The pair was last seen trading above 1.0450 and the technical outlook suggests that it has more room on the upside before turning technically overbought.

Toward the end of the European session on Wednesday, month-end flows caused EUR/USD to drop below 1.0300. With the US Dollar coming under heavy selling pressure later in the day, the pair staged an impressive comeback and ended up gaining nearly 100 pips on the day. 

FOMC Chairman Jerome Powell said it would make sense to "moderate the pace of interest rate hikes"  and noted that a smaller rate increase could come as early as December.

Powell further added that the terminal rate was likely to be "somewhat higher" than the 4.6% projected in September's Summary of Economic Projections and said they have made substantial progress toward a "sufficiently restrictive" policy. "

Following these remarks, the probability of a 50 basis points (bps) in December climbed to nearly 80%, according to the CME Group FedWatch Tool, from 66%. In turn, the benchmark 10-year US Treasury bond yield fell sharply and caused the US Dollar to suffer heavy losses against its major rivals.

In the second half of the day, the US Bureau of Economic Analysis will release the Personal Consumption Expenditures (PCE) Price Index data. Markets expect the Core PCE Price Index, the Fed's preferred gauge of inflation, to decline to 5% in October from 5.1% in September. A bigger-than-forecast decline in Core PCE inflation is likely to force the US Dollar to stay on the back foot. On the other hand, the positive impact of an unexpected increase on the US Dollar's valuation is likely to remain short-lived following Powell's remarks.

Finally, the ISM's Manufacturing PMI will be looked upon for fresh impetus. Again, for this data to help the US Dollar gather strength, investors would want to see a big increase in the headline PMI reading and the Prices Paid component. 

EUR/USD Technical Analysis

The Relative Strength Index (RSI) indicator on the four-hour chart stays below 60 despite Wednesday's sharp increase, suggesting that EUR/USD could continue to push higher before staging a downward correction. On the upside, 1.0475 (static level) aligns as interim resistance before 1.0500 (psychological level, multi-month high set on November 28) and 1.0530 (static level).

First support is located at 1.0400 (psychological level, static level). With a four-hour close below that level, additional losses toward 1.0350 (50-period Simple Moving Average (SMA) on the four-hour chart) and 1.0300 (100-period SMA, static level) could be witnessed.