EUR/USD Forecast: Recovery gains momentum as investors reassess Fed's rate outlook

  • EUR/USD has extended its rebound on renewed dollar weakness.
  • Investors reassess Fed rate hike expectations in the face of a new coronavirus variant.
  • US Treasury bond yields are falling sharply amid risk aversion.

EUR/USD has gained traction on Friday and looks to build on its recovery gains with the greenback coming under strong selling pressure ahead of the weekend.

Reports suggesting that the current vaccines might be ineffective against the heavily-mutated new coronavirus variant detected in South Africa are forcing investors to reassess the Federal Reserve's policy outlook. 

According to the CME Group's FedWatch Tool, markets are now pricing a 34% chance of the Fed leaving its policy rate unchanged by June 2022, compared to 18% on Thursday. Additionally, the 10-year US Treasury bond yield is down more than 7% on a daily basis. The World Health Organization (WHO) said they have detected nearly 100 sequences of the new B.1.1.159 variant and noted that early analysis shows it has "a large number of mutations."

Reflecting the broad-based dollar weakness, the US Dollar Index is falling nearly 0.5% so far on the day.

There won't be any high-tier macroeconomic data releases and investors will keep a close eye on coronavirus headlines. Although the greenback is likely to outperform the risk-sensitive currencies, it could find it difficult to gather strength against the common currency with market participants refraining from pricing the policy divergence between the Fed and the European Central Bank (ECB).

EUR/USD Technical Analysis

There is an obvious bullish shift in EUR/USD's near-term technical outlook. The Relative Strength Index (RSI) indicator advanced beyond 50 for the first time in a week and the pair is holding above the 20-period SMA. 

Currently, the pair is testing the 50-period SMA at 1.1280 and additional gains toward 1.1300 (psychological level) could be witnessed. In case buyers manage to flip the latter into support, next resistance aligns at 1.1370 (static level).

On the downside, supports are located at 1.1230 (20-period SMA), 1.1200 (psychological level) and 1.1185 (2021 low).

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