EUR/USD Forecast: Investors await technical breakout of well-defined levels

  • EUR/USD has gone into a consolidation phase around 1.1300.
  • ECB's Knot sees possibility of bond-buying program ending earlier than planned.
  • Investors are likely to remain on the sidelines while waiting for volumes to return to normal levels.

For the second straight day on Thursday, EUR/USD climbed above 1.1350 but failed to preserve its bullish momentum. The pair seems to have gone into a consolidation phase around 1.1300 on Friday and market participants will eye a breakout of well-defined technical levels when the market action normalizes after the New Year holiday.

On Thursday, European Central Bank Governing Council member Klaas Knot noted that the ECB could end its bond-buying program earlier than planned if inflation continues to surprise to the upside. Knot further argued that it was appropriate for the ECB to prepare for gradual monetary policy normalization. Although these remarks helped the shared currency find some demand, the dollar's resilience limited EUR/USD's upside.

With the benchmark 10-year US Treasury bond yield holding above the key 1.5% mark heading into the new year, the US Dollar Index, which tracks the greenback's performance against a basket of six major currencies, is staying afloat above 96.00.

US bond markets will close early in observance of the New Year's Eve and the market action is expected to remain subdued in the remainder of the day.

EUR/USD Technical Analysis

The Relative Strength Index (RSI) indicator on the four-hour chart has retreated to 50, confirming the view that buyers show no interest in the common currency following the rejection at 1.1360. On the upside, 1.1340 (static level) aligns as interim resistance ahead of 1.1360 (static level, post-ECB high) and 1.1400 (psychological level). 

The 100-period and the 200-period SMAs on the same chart seem to have formed a strong support area at 1.1290/1.1300. In case a four-hour candle closes below that level, additional losses toward 1.1270 (static level) could be witnessed.

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