EUR/USD Forecast: The constructive bias remains in place above 1.0790

The US Dollar (USD) managed to trim part of its recent decline, leaving the risk complex vulnerable while prompting another test of the 1.0890 region by EUR/USD on Tuesday.

The pair's third consecutive daily advance occurred amidst a late bounce in the Greenback and a marked rebound in US yields, against the backdrop of renewed speculation that the Federal Reserve (Fed) might maintain its restrictive stance longer than expected, a view that remained propped up by hawkish Fedspeak.

On the latter, the President of the Reserve Bank of Minneapolis, Neel Kashkari, reiterated that the Fed should wait for significant progress on inflation before reducing interest rates.

According to the CME Group’s FedWatch Tool, there is now nearly a 47% probability of lower interest rates by September, down from over 60% last week.

Regarding the European Central Bank (ECB), Board members continued to see the bank reducing rates in June, although uncertainty remains well in place regarding the potential interest rate decisions beyond the summer.

Still around the ECB, its Consumer Expectations Survey revealed a decrease in inflation expectations, reaching their lowest level since September 2021. Expectations for inflation over the next 12 months dropped to 2.9%, reaching their lowest level since September 2021. However, expectations for inflation three years out fell to 2.4%, still above the bank's 2% target.

Looking ahead, the relatively subdued economic fundamentals in the Eurozone, coupled with the resilience of the US economy, support the ongoing narrative of Fed-ECB policy divergence and point towards a stronger Dollar in the long run. Considering the rising probability of the ECB reducing rates before the Fed, the potential for further weakness in EUR/USD should be considered in the medium term.

EUR/USD daily chart

EUR/USD short-term technical outlook

An further comeback may see EUR/USD revisit the May high of 1.0894 (May 16), followed by the March top of 1.0981 (March 8) and the weekly peak of 1.0998 (January 11), all before hitting the key 1.1000 barrier.

On the downside, a breakdown of the 200-day SMA of 1.0787 may lead to the May low of 1.0649 (May 1), ahead of the 2024 bottom of 1.0601 (April 16) and the November 2023 low of 1.0516 (November 1). Once this zone is passed, the pair may target the weekly low of 1.0495 (October 13, 2023), the 2023 low of 1.0448 (October 3), and the 1.0400 round milestone.

So far, the 4-hour chart suggests some resistance in the upper 1.0800s. The next up-barrier is 1.0894 ahead of 1.0942. Looking southward, the 100-SMA at 1.0820 leads, followed by 1.0766 and the 200-SMA at 1.0752. The relative strength index (RSI) decreased to about 53.