EUR/USD Forecast: Not out of the woods yet

The bullish performance of the US Dollar (USD) sparked a mild knee-jerk in EUR/USD, which failed to extend the recent recovery further north of the 1.0710-1.0715 band on Wednesday.

The uptick in the Greenback followed auspicious prints from the US docket, while investors continued to adjust to the potential timing of a Federal Reserve (Fed) rate cut, now anticipated to occur in September, although the possibility of a move in July hasn't been completely discarded.

The resurgence of bid bias in the US Dollar coincided with a similar bounce in US yields across various timeframes and a consistent narrative emphasizing the divergence in monetary policy between the Fed and other G10 central banks, particularly the European Central Bank (ECB).

In this context, recent statements from Board members leaned towards the ECB starting its easing cycle in June, with speculation circulating about three interest rate cuts (or 75 bos) for the remainder of the year. Conversely, the Fed is anticipated to implement its first interest rate reduction in September, although the possibility of a similar move in July cannot be entirely discounted.

Looking ahead, the relatively subdued economic fundamentals in the Eurozone, combined with the resilience of the US economy, reinforce expectations for a stronger Dollar in the medium term, especially considering the likelihood that the ECB may initiate rate cuts before the Fed. In such a scenario, EUR/USD is expected to experience a more pronounced decline in the relatively medium-term horizon.

In the domestic calendar, the Business Climate in Germany gathered extra pace in April, which added to investors’ optimism in the wake of the earlier release of encouraging PMIs.

EUR/USD daily chart

EUR/USD short-term technical outlook

On the upside, EUR/USD is projected to encounter early resistance at the crucial 200-day SMA of 1.0809, seconded by the April peak of 1.0885 (April 9), the March high of 1.0981 (March 8), and the weekly top of 1.0998 (January 11), all before hitting the psychological barrier of 1.1000.

Looking southwards, the breach of the 2024 low of 1.0601 (April 16) might 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) may begin to form before the round milestone of 1.0400.

The 4-hour chart indicates that the bullish trend has remained in place. The first up-barrier is at 1.0714, followed by the 100-SMA of 1.0727 and finally 1.0756. Meanwhile, the initial support is at 1.0601, followed by 1.0516. The Relative Strength Index (RSI) rose to the proximity of 59.