EUR/USD Forecast: Further recovery faces an initial test at the 200-day SMA

The US Dollar (USD) traded in a vacillating fashion in the low-105.00s when tracked by the USD Index (DXY) on Wednesday, providing humble support to risk sentiment and encouraging EUR/USD to extend its upside impulse for the third session in a row near the 1.0750 zone.

The pair's marginal upward movement was also bolstered by easing political concerns in France, while speculation about potential Federal Reserve (Fed) interest rate cuts this year also accompanied the pair’s price action.

Regarding the Fed, the recent cautious stance from Fed officials appeared to limit the Greenback’s downside after they reiterated their prudent approach regarding the commencement of the Fed’s easing cycle.

On the latter, the CME Group's FedWatch Tool now indicates a nearly 65% probability of lower interest rates by the September 18 meeting.

In the short term, the ECB's recent rate cut, contrasting with the Fed's decision to maintain rates, has widened the policy gap between the two central banks, potentially exposing EUR/USD to further weakness.

On this, it is worth noting that ECB Vice President Luis de Guindos emphasized on Tuesday that rate decisions will align with the release of the bank's updated macroeconomic projections in September.

Looking ahead, the Eurozone's emerging economic recovery and perceived slowdowns in the US economy are expected to mitigate this disparity, providing some support for the pair on the short-term horizon.

EUR/USD daily chart

EUR/USD short-term technical outlook

If the rebound in EUR/USD gathers impetus, the 200-day SMA at 1.0788 emerges as the immediate target, ahead of the weekly high of 1.0852 (June 12), and the June top of 1.0916 (June 4). The breakout of this level exposes the March peak of 1.0981 (March 8), seconded by the weekly high of 1.0998 (January 11) and the key 1.1000 threshold.

In case bears regain the upper hand, the pair may retest the June low of 1.0667 (June 14), prior to the May low of 1.0649 (May 1), and lastly the 2024 bottom of 1.0601 (April 16).

The 4-hour chart thus far shows some indications of gradual recovery. Bulls should aim for 1.0810 first, followed by 1.0852, 1.0916, and ultimately 1.0942. The initial support, instead, turns up at 1.0667, seconded by 1.0649 and 1.0601. The Relative Strength Index (RSI) has decreased to about 51.