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EUR/USD Forecast: Further consolidation appears on the cards

  • EUR/USD struggled to retest the 1.0800 region once again.
  • The US Dollar rose to two-day highs despite lower yields.
  • The Fed’s Kashkari said the bank might not need to cut rates this year.

The daily bounce of the US Dollar (USD) sparked a fresh knee-jerk and prompted EUR/USD to give away part of the four-session move higher on Tuesday. Once again, the pair fell short of retesting or surpassing the pivotal 1.0800 region, which marks the so-far weekly tops.

The pick-up in the Dollar’s upside momentum followed another negative session in US yields across different maturities as investors continued to assess the recent Federal Reserve's (Fed) decision to maintain its interest rates unchanged, alongside disappointing figures from April's Nonfarm Payrolls (+175K).

It is worth recalling that during the Fed meeting, the Committee reaffirmed its readiness for rate adjustments while expressing concerns about inflation and potential economic stability risks. Moreover, the central bank hinted at a slowdown in the pace of balance sheet reduction, while Chair Jerome Powell suggested that the next policy move is unlikely to involve a rate hike.

Looking at the longer term, occasional Dollar weakness is anticipated to be transitory due to deferred expectations of a possible Fed interest rate cut later in the year.

Meanwhile, the monetary policy atmosphere remained unaltered, accentuating the contrast between the Fed and other G10 central banks, particularly the European Central Bank (ECB).

On the latter, recent statements from ECB officials hinted at the likelihood of the ECB commencing its easing cycle in June, sparking speculation about three interest rate cuts (equivalent to 75 basis points) for the remainder of the year. Doubts remain on the rise, however, regarding the potential next decisions by the central bank beyond the summer break.

Looking ahead, the relatively subdued economic fundamentals in the Eurozone, coupled with the resilience of the US economy, bolster expectations for a stronger Dollar in the medium term, particularly considering the growing likelihood of the ECB cutting rates well before the Fed.

Given this outlook, further weakness in EUR/USD should be considered a possibility in the medium term.

EUR/USD daily chart

EUR/USD short-term technical outlook

On the upside, EUR/USD is projected to face first resistance at the May high of 1.0812 (May 3), which comes before the intermediate 100-day SMA of 1.0836 and the April top of 1.0885 (April 9). North of here is the March peak of 1.0981 (March 8), prior to the weekly high of 1.0998 (January 11), all before reaching the psychological threshold of 1.1000.

Looking south, a break of the 2024 bottom of 1.0601 (April 16) might indicate a return to the November 2023 low of 1.0516 (November 1). Once this region is cleared, spot might dispute the weekly low of 1.0495 (October 13, 2023) ahead of the 2023 bottom of 1.0448 (October 3) and the round milestone of 1.0400.

The 4-hour chart shows the pair entering some consolidative range. Against that, there is an immediate up-barrier at 1.0812, seconded by 1.0885. Meanwhile, 1.0745 offers early support, ahead of 1.0649 and 1.0601. The relative strength index (RSI) lost momentum and receded to around 54.

Author

Pablo Piovano

Born and bred in Argentina, Pablo has been carrying on with his passion for FX markets and trading since his first college years.

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