EUR/USD Forecast: Next on the upside comes 1.0885

The persistence of the negative sentiment surrounding the US Dollar (USD) spurred another positive reaction in EUR/USD, propelling it towards five-week highs above the 1.0800 hurdle on turnaround Tuesday.

The retreat in the Dollar coincided with a broadly negative session in US yields across various durations, persisting within an unchanged macroeconomic environment and following the upside surprise in US Producer Prices in April. This environment continues to anticipate the Federal Reserve (Fed) embarking on its easing cycle in September, in contrast to a potential earlier onset of interest rate cuts by the European Central Bank (ECB), likely in June.

Regarding the latter point, the CME Group’s FedWatch Tool indicates a nearly 66% probability of lower interest rates in the US by September.

The above appeared reinforced after Federal Reserve Chief Jerome Powell expressed his anticipation of US inflation continuing its decline through 2024, mirroring the trend observed last year. He also remarked that it seemed improbable for the Fed to implement further interest rate hikes.

Speaking of inflation, the forthcoming release of the Consumer Price Index (CPI) on Wednesday may offer additional insights into the potential timing of the Fed’s initiation of its rate-cutting programme.

Looking at the broader picture, any temporary weakness in the Dollar is expected to be transitory due to revised expectations of a potential Fed interest rate cut later in the year.

Meanwhile, the unchanged monetary policy landscape underscores the divergence between the Federal Reserve and other G10 central banks, particularly the European Central Bank (ECB).

Regarding the ECB, recent statements from policymakers have hinted at an increasing likelihood of the bank initiating its easing process in June, although uncertainties persist regarding the ECB’s future decisions beyond the summer. In this regard, de Guindos mentioned earlier on Thursday that the ECB exercises caution in predicting any trends beyond June.

Looking forward, the relatively subdued economic fundamentals in the Eurozone, coupled with the resilience of the US economy, underpin expectations for a stronger Dollar in the medium term, especially given the growing probability of the ECB reducing rates well before the Fed.

Considering this perspective, the potential for further weakness in EUR/USD should be taken into account in the medium term.

EUR/USD daily chart

EUR/USD short-term technical outlook

On the upside, EUR/USD is projected to encounter first resistance at the May high of 1.0825 (May 14), an area coincident with the intermediate 100-day SMA. Up from here aligns the April top of 1.0885 (April 9) prior to the March peak of 1.0981 (March 8), and the weekly high of 1.0998 (January 11), all before the psychological 1.1000 threshold.

In the opposite direction, a break below the May low of 1.0649 (May 1) might bring the 2024 bottom of 1.0601 (April 16) back into focus ahead of the November 2023 low of 1.0516 (November 1). Once this zone is cleared, the pair may challenge the weekly low of 1.0495 (October 13, 2023), seconded by the 2023 bottom of 1.0448 (October 3) and the 1.0400 round milestone.

So far, the 4-hour chart has shown a consistent upward trend. Against this, there is an instant uphill hurdle at 1.0825, followed by 1.0885. Meanwhile, initial contention is seen around the 200-SMA of 1.0737, followed by 1.0723. The relative strength index (RSI) climbed to about 68.