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EUR/USD Forecast: Near-term consolidation remains in the pipeline

  • EUR/USD traded with a mild bid bias around 1.0820.
  • The Greenback navigated a vacillating session ahead of the US CPI.
  • There was no news from Powell’s second testimony.

The US Dollar (USD) alternated gains with losses on Wednesday, prompting the USD Index (DXY) to end the session barely changed from the previous day’s closing levels.

This irresolute price action in the Greenback motivated EUR/USD to also hover around the 1.0820 region, up marginally for the day, as investors digested the second Congressional testimony by Chair Jerome Powell before Congress.

While Powell’s message largely matched his previous comments, he suggested that he was not yet ready to conclude that inflation was sustainably decreasing to 2%, though he expressed "some confidence" that it was heading in that direction.

Following Powell’s testimony, the macroeconomic environment remained relatively stable on both sides of the Atlantic. That is, while the European Central Bank (ECB) is contemplating further rate cuts beyond the summer, with market expectations suggesting two additional cuts by the end of the year, there is ongoing debate among investors about whether the Fed will implement one or two rate cuts this year, despite the Fed's current projection of a single cut, likely in December.

According to the CME Group's FedWatch Tool, there is approximately a 74% chance of interest rate cuts in September, rising to nearly 96% by December.

The ECB's rate cut in June, combined with the Fed's decision to maintain rates, has widened the policy divergence between the two central banks. This divergence could potentially lead to further weakening of EUR/USD in the short term.

However, the prospects of economic recovery in the Eurozone, along with signs of cooling in some key US economic indicators, may mitigate this disparity and occasionally support the pair in the near future.

Moving forward, market participants should closely follow the release of US inflation figures tracked by the CPI on Thursday, as those readings could impact on the timing of the interest rate cut by the Fed.

EUR/USD daily chart

EUR/USD short-term technical outlook

EUR/USD is expected to meet its initial up-barrier at the July peak of 1.0845 (July 8), followed by the weekly high of 1.0852 (June 12) and the June top of 1.0916 (June 4). If the pair breaks above this level, it might bring the March peak of 1.0981 (March 8) back into focus, followed by the psychological 1.1000 mark.

If bears regain the upper hand, spot may approach the 200-day SMA at 1.0800 before falling to a low of 1.0666 on June 26. From here, the May low of 1.0649 (May 1) leads to the 2024 bottom of 1.0601 (April 16).

Looking at the big picture, it appears that additional gains are on the way if the important 200-day SMA is consistently surpassed.

So far, the 4-hour chart shows some gradual recovery. The 200-SMA at 1.0783 provides the initial contention, followed by the 55-SMA at 1.0781 and finally 1.0709. On the upside, the initial obstacle is at 1.0845, followed by 1.0852 and 1.0902. The Relative Strength Index (RSI) has decreased to about 53.

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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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