EUR/USD Forecast: Recovering to critical support, but reality may strike back soon

EUR/USD extends its gains above 1.1150 after setting a new 2019 trough of 1.1110 on Friday.

US GDP came out at 3.2% annualized on Friday, better than expected but with a few caveats. The figure came on top of low inflation levels with nominal GDP not rising that much. In addition, the Fed has less of an urge to raise rates. Moreover, expectations were already high after the upbeat Durable Goods Orders on Friday, triggering a "buy the rumor, sell the fact" response. 

The second focus of markets is the Spanish general election. Incumbent centrists PSOE easily won the election but lack an absolute majority. Markets would like to see a coalition with market-friendly Ciudadanos. Both parties have a majority together, but both have ruled out cooperation.

PM Pedro Sánchez will form a government with the left-wing Podemos and regional parties from Catalonia and the Basque Country. Once the dust settles, the euro may not be so pleased with the results. It will unlikely rise on the M3 Money Supply and Private Loans figures that are released shortly. 

However, a more significant downward driver may come from US data. The world's largest economy releases the Fed's preferred measure of inflation, the Core PCE Price Index which is not expected to shine. Personal Spending and Personal Income are also of interest.

Of itself, the data is not significant enough to trigger substantial moves, but it is set to serve as a reminder that the US economy is outperforming the European one.

While today's calendar is light, a busy week awaits markets: Euro-zone GDP, EZ inflation, the Fed decision, and the Non-Farm Payrolls stand out.

EUR/USD Technical Analysis

The Relative Strength Index on the four-hour chart shows that EUR/USD exited oversold conditions, rising above 30. Momentum remains to the downside and the pair remains below the 50, 100, and 200 Simple Moving Averages. All in all, the picture remains bearish.

The critical line is 1.1176. It was the trough in March and the previous 2019 low. Moreover, EUR/USD hit the level on Friday, strengthening its role as a clear separator of ranges. A break above it may unleash the upside while a failure to rise could push the pair lower.

Above 1.1176 we note 1.1205 that was a support line in early April. The next line is 1.1230 which was a swing low around the same time and also capped a recovery attempt last week. 1.1265 and 1.1280 are next.

Looking down, 1.1140 was the first level below 1.1176 and serves as weak support. 1.1110 was the low point on Friday and the lowest in 22 months. 1.1025 and 1.0900 are next and they both date back to June 2017.