EUR/USD Forecast: Next on the upside comes 1.0750

The resurgence of downward pressure on the US Dollar (USD) encouraged EUR/USD to trim Tuesday’s losses and reclaim the area well beyond the 1.0700 hurdle on Wednesday.

That said, this Dollar's downside momentum accelerated in the wake of the Federal Reserve’s (Fed) decision to keep its interest rates unchanged at 5.25%-5.50%, as widely anticipated, at the end of its two-day meeting on Wednesday.

Indeed, the Committee remained consistent with its Fed Funds Target Range (FFTR) at 5.25%–5.50% and aimed for borrowing cost reductions but raised concerns about inflation and potential halt in economic balance. The central bank also announced plans to slow down its balance sheet reduction pace, contrasting earlier warnings.

Adding selling pressure to the Greenback, Chair Jerome Powell argued that cutting rates won't be suitable until the Committee is more confident that inflation is returning to the 2% target. Powell said that, with time, current policy measures will be effective in reining in inflation to the target, adding that it's improbable that the next policy adjustment will involve a rate hike.

In the longer run, weakness in the US Dollar is expected to be short-lived due to delayed expectations of a potential interest rate cut by the Federal Reserve (Fed) later this year.

Regarding this, the FedWatch Tool monitored by CME Group indicated that the probability of a 25 bps interest rate cut at the September 18 meeting dropped to nearly 40%.

Following the FOMC event, US yields maintained their initial negative trend, although the broad macro scenario continue to emphasize the divergence in monetary policies between the Fed and other G10 central banks, particularly the European Central Bank (ECB).

Recent statements from ECB board members have hinted at the possibility of the ECB commencing its easing cycle in June, sparking speculation about three interest rate cuts (or 75 basis points) for the remainder of the year.

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

In this context, EUR/USD is expected to experience a more significant decline in the medium term.

EUR/USD daily chart

EUR/USD short-term technical outlook

On the upside, EUR/USD is expected to encounter first resistance at the weekly high of 1.0752 (April 26), which is ahead of the key 200-day SMA of 1.0799, and the April peak of 1.0885 (April 9). North from here comes the March high of 1.0981 (March 8), seconded by the weekly top of 1.0998 (January 11), all before the psychological barrier of 1.1000.

Looking south, a break of the 2024 low of 1.0601 (April 16) may signal a return to the November 2023 low of 1.0516 (November 1), which comes before the weekly low of 1.0495 (October 13, 2023). Once this area is reached, a visit to the 2023 bottom of 1.0448 (October 3) is possible before reaching the round milestone of 1.0400.

The 4-hour chart shows a sudden U-turn and the pair now targets 1.0752, ahead of the 200-SMA at 1.0761. Meanwhile, 1.0673 provides early support, ahead of 1.0601 and 1.0516. The relative strength index (RSI) jumped past 58.