EUR/USD Forecast: Euro to have a tough time regathering recovery momentum

EUR/USD has stabilized below 1.0200 following Tuesday's drop.
Investors are reassessing the Fed's rate outlook ahead of key ISM Services PMI data.
Bears could show interest if the pair falls below 1.0150 support.

Eren Sengezer FXStreet

EUR/USD has gone into a consolidation phase below 1.0200 after having lost more than 100 pips on Tuesday. The pair could find it difficult to gather recovery momentum in the near term amid a cautious market mood.

The risk-averse market environment amid heightened geopolitical tensions allowed the dollar to gather strength against its rivals on Tuesday. Additionally, relatively hawkish comments from Fed officials help the currency hold its ground.

Chicago Fed President Charles Evans said a 50 basis points (bps) rate hike would be a reasonable assessment for the September policy meeting but added a 75 bps increase would also be okay. Meanwhile, Cleveland Fed President Loretta Mester noted that she has not seen inflation cool ‘at all’ and reiterated that they are committed to bringing inflation under control. Following these comments, the probability of a 75 bps rate hike in September climbed above 40% from 20% earlier in the week, according to the CME Group's FedWatch Tool.

Later in the day, the ISM will release the Services PMI report for July. On Monday, the ISM's Manufacturing PMI survey showed a significant decline in the Prices Paid component. In case the data shows that inflation pressures in the service sector eased in a similar way, the dollar could weaken against its peers and open the door for a EUR/USD rebound.

Markets are expecting the Prices Paid component of the service sector to rise to 81.6 in July from 80.1 in June. A reading in line with market consensus, or even higher, should allow the US Dollar Index to regain its traction and weigh on EUR/USD.

EUR/USD Technical Analysis

EUR/USD faces immediate resistance at 1.0200 (psychological level, 50-period SMA on the four-hour chart). As long as this level stays intact, buyers could opt to remain on the sidelines. In case the pair reclaims that level and starts using it as support, additional gains toward 1.0230 (Fibonacci 38.2% retracement level of the latest downtrend), 1.0275 (200-period SMA) and 1.0300 (Fibonacci 50% retracement) could be witnessed.

On the downside, 1.0150 (Fibonacci 23.6% retracement) aligns as first support ahead of 1.0100 (psychological level, static level). A four-hour close below the latter could be seen as a significant bearish development and trigger another leg lower toward parity.

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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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