EUR/USD Forecast: Further weakness not ruled out below 1.0790

The slight downtick in the US Dollar (USD) motivated the USD Index (DXY) to keep its business around 105.80 on Tuesday, extending the consolidative mood so far this week.

This modest increase in the Greenback also prompted EUR/USD to maintain its trade in the 1.0730-1.0740 band in the first half of the week, as investors continued to digest the outcomes of the French election on June 30 as well as the policy discussion between President Christine Lagarde and Chair Jerome Powell at the ECB Forum in Sintra (Portugal).

Regarding this, Lagarde asserted that the euro zone has made significant progress along its path of disinflation, though uncertainties remain about the economic growth outlook. Meanwhile, Powell suggested that the Fed needs additional data before considering interest rate cuts, aiming to confirm whether recent subdued inflation readings truly reflect ongoing price pressures.

On a broader scale, the macroeconomic situation on both sides of the Atlantic remained stable. The European Central Bank (ECB) is contemplating further rate cuts beyond the summer, with market expectations pointing to two additional cuts later in the year. Supporting further rate cuts, preliminary inflation figures in the euro area saw the CPI rising by 2.5% YoY in June, while the Core CPI challenged expectations and advanced by 2.9% over the last twelve months.

In contrast, market participants are still debating whether the Federal Reserve (Fed) will implement one or two rate cuts this year in spite of the Fed's projection of just one cut, likely in December.

The recent improvement in the US Dollar is partly due to hawkish comments from Fed officials, while the widening monetary policy gap between the Fed and other major central banks has also contributed to the euro's decline.

According to the CME Group's FedWatch Tool, there is about a 69% probability of lower interest rates in September, compared to nearly a 95% chance at the December 18 meeting.

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

However, the Eurozone's emerging economic recovery and the perceived weakening of US fundamentals are expected to narrow this disparity, possibly providing occasional support for the pair in the near future.

On the political front, the next risk event for the single currency comes from the upcoming second round of the French snap elections due on July 7.

EUR/USD daily chart

EUR/USD short-term technical outlook

If bears retake control, EUR/USD may retest its June low of 1.0666 (June 26), then the May low of 1.0649 (May 1), and lastly the 2024 low of 1.0601 (April 16).

Meanwhile, bouts of strength may put the pair on pace to revisit the 200-day SMA at 1.0791, prior to the weekly high of 1.0852 (June 12) and the June top of 1.0916 (June 4). The breakout of this level may put the March peak of 1.0981 (March 8) back into focus, ahead of the weekly high of 1.0998 (January 11) and the psychological 1.1000 mark.

So far, the 4-hour chart shows a loss of momentum in the initial bullish effort. The initial resistance level is 1.0776, followed by 1.0794. The initial support is at 1.0666, ahead of 1.0649 and 1.0601. The Relative Strength Index (RSI) climbed to about 56.