EUR/USD Forecast: Risk-aversion to limit euro's rebound

EUR/USD has been having a difficult time building on Friday's recovery gains with investors turning cautious at the beginning of the week. Although the pair manages to hold near mid-1.0500s early Monday, it is unlikely to gather bullish momentum in the current market environment.

Market participants stay away from risk-sensitive assets amid escalating geopolitical tensions in the European session. The European Union (EU) is reportedly planning to phase out Russian oil imports by the end of 2022. Energy ministers from EU members will be holding emergency talks on Monday to respond to Moscow's threat of cutting gas supplies unless they are paid for in roubles. Reflecting the souring market mood, the Euro Stoxx 600 Index is down nearly 1% to start the week.

In the meantime, European Central Bank (ECB) Vice President Luis de Guindos told Bloomberg over the weekend that a rate increase in July was "possible but not likely," causing investors to second-guess the euro's recovery prospects.

In the second half of the day, the ISM Manufacturing PMI report will be featured in the US economic docket. The headline PMI is expected to rise to 58 in April from 57.1 in March. Ahead of Wednesday's all-important FOMC meeting, however, the market reaction to the PMI data is likely to remain muted. Hence, the risk perception should continue to drive EUR/USD's action.

EUR/USD Technical Analysis

EUR/USD failed to make a four-hour close above the 20-period SMA despite testing that level during the Asian session. Additionally, the Relative Strength Index (RSI) indicator on the four-hour chart stays below 50, pointing to a bearish bias in the near term. Nevertheless, the fact that the price is moving above the descending trend line coming from April 21 suggests that the pair's losses could remain limited.

On the downside, 1.0500 (psychological level) aligns as first technical support. In case sellers drag the price below that level, the next bearish target is located at 1.0470 (multi-year low set on April April 26).

In order to extend its rebound, EUR/USD needs to rise above 1.0560 (static level) and start using that level as support. Next resistances align at 1.0600 (psychological level) and 1.0660 (static level, 50-period SMA).