EUR/USD Forecast: The Fed holds the key

EUR/USD charted humble losses on Tuesday, building on Monday’s pullback against the backdrop of a generalized cautious trade in light of the interest rate decision by the Federal Reserve (Fed) on Wednesday.

In contrast, the US Dollar could not sustain the early uptick and gave away those gains as the session drew to a close, particularly in response to the late and strong rebound in the Japanese yen, which regained buying traction after news that the BoJ might signal further tightening of its policy at its imminent gathering. Against that, the USD Index (DXY) settled around the mid-104.00s following earlier multi-day highs near 104.80.

Additionally, the daily gains in the USD were accompanied by a decline in US and German yields, as investors are anticipating rate cuts from both the Fed and the European Central Bank (ECB) after the summer.

Regarding monetary policy, the Fed is expected to maintain current rates at the July 31 meeting, but Chief Jerome Powell may signal the start of an easing cycle in September.

Similarly, recent comments from ECB Vice President Luis de Guindos suggest a potential rate cut by the ECB in September.

The policy divergence between the Fed and the ECB is likely to remain steady, with both expected to cut rates soon. However, the US is expected to experience a soft landing, while the Eurozone's recovery is losing momentum, possibly weakening the Euro further in the medium term.

On the domestic calendar, Germany’s flash Inflation Rate saw the CPI rise more than expected by 2.3% in the year to July, while the flash GDP Growth Rate in Germany surprised to the downside after the economy is now seen contracting by 0.1% QoQ and YoY. In the broader euro bloc, the flash GDP Growth Rate came in above estimates and expects the economy of the bloc to expand by 0.3% QoQ in Q2 and 0.6% YoY.

In the US, the always-relevant Consumer Confidence tracked by the Conference Board improved to 100.3 in July, and JOLTs Job Openings receded to 8.140M in June (from 8.230M).

EUR/USD daily chart

EUR/USD short-term technical outlook

On the downside, the weekly low of 1.0798 (July 30) is the next target for EUR/USD prior to the provisional 100-day SMA at 1.0794, and the June low of 1.0666 (on June 26), all ahead of the May low of 1.0649 (May 1).

On the upside, the initial hurdle comes at the July high of 1.0948 (July 17), followed by the March top of 1.0981 (March 8) and the critical 1.1000 yardstick.

Looking at the broader picture, the pair's bearish bias should return if it remains below the critical 200-day SMA (1.0821).

So far, the four-hour figure shows some acceleration in the negative bias. Nonetheless, the 55-SMA at 1.0864 provides temporary hurdle, seconded by 1.0948, 1.0981, and finally 1.1000. On the downside, 1.0798 comes first, before 1.0709. The relative strength index (RSI) rebounded to about 40.