EUR/USD Forecast: Gains look limited beyond 1.0800

An extra rebound in the US Dollar (USD) prompted EUR/USD to build on Tuesday’s retracement and visit the 1.0730 region, or three-day lows, on Wednesday. That said, spot extended further the recent rejection from tops north of 1.0800 the figure (May 3).

The Dollar's uptick came in tandem with a positive session in US bond yields across various maturities as investors continued to digest the recent decision by the Federal Reserve (Fed) to maintain interest rates unchanged, alongside the likelihood of the start of the bank’s easing cycle in September.

On the latter, CME Group’s FedWatch Tool sees the probability of a 25 bps rate cut at the September 18 meeting at nearly 50%.

It is worth noting that the Fed reiterated its openness to rate adjustments while expressing concerns about inflation and potential risks to economic stability. Additionally, the central bank hinted at a slowdown in the pace of balance sheet reduction, with Chair Jerome Powell suggesting that the next policy move is unlikely to involve a rate hike.

Looking ahead, intermittent Dollar weakness is expected to be short-lived due to deferred expectations of a potential Fed interest rate cut later in the year.

Meanwhile, the monetary policy environment remained unchanged, highlighting the contrast between the Fed and other G10 central banks, notably the European Central Bank (ECB).

Regarding the ECB, recent statements from ECB officials suggested the increasing possibility of the ECB starting its easing programme in June, leading to speculation about three interest rate cuts (equivalent to 75 basis points) for the remainder of the year. However, uncertainties persist regarding the central bank's future decisions beyond the summer.

Looking forward, the relatively subdued economic fundamentals in the Eurozone, combined with the resilience of the US economy, support expectations for a stronger Dollar in the medium term, particularly considering the increasing likelihood of the ECB cutting rates well before the Fed.

Given this perspective, further weakness in EUR/USD should be viewed as a potential outcome 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 1.0834 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, 1.0735 offers early support, ahead of 1.0649 and 1.0601. The relative strength index (RSI) lost momentum and receded to the sub-50 zone.