EUR/USD Forecast: The hunt for 1.0800 and above

The resurgence of some bearish sentiment in the US Dollar (USD) sparked a noticeable reaction in EUR/USD, sending it to the area of two-day highs around 1.0780 on Thursday.

The Dollar's retracement also coincided with a broad-based negative session in US yields across different maturities, particularly after investors assessed the higher-than-expected increase in weekly claims while they continued to digest the Federal Reserve's recent decision to keep interest rates unchanged, along with the probability of the central bank initiating its easing cycle in September.

Regarding the latter point, CME Group’s FedWatch Tool indicated that the probability of lower rates in September rose to around 68%.

The Fed reiterated its readiness to adjust rates while expressing concerns about inflation and potential risks to economic stability. Moreover, the central bank hinted at a slowdown in the pace of balance sheet reduction, with Chair Jerome Powell suggesting that the next policy move is unlikely to involve a rate hike.

Looking ahead, any temporary weakness in the Dollar is expected to be short-lived due to the postponed expectations of a potential Fed interest rate cut later in the year.

Meanwhile, the unchanged monetary policy environment underscores the disparity between the Federal Reserve and other G10 central banks, notably the European Central Bank (ECB).

In relation to the ECB, recent statements from rate setters have hinted at an increasing likelihood of the bank commencing its easing programme in June, although uncertainties persist regarding the ECB’s future decisions beyond the summer. On the latter, de Guindos remarked earlier on Thursday that the ECB is cautious to predict any trend beyond June.

Looking forward, the relatively subdued economic fundamentals in the Eurozone, coupled with the resilience of the US economy, support expectations for a stronger Dollar in the medium term, particularly considering the growing probability of the ECB cutting rates well before the Fed.

With this perspective in mind, 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

On the upside, EUR/USD is expected to encounter first resistance at the May high of 1.0812 (May 3), which precedes the intermediate 100-day SMA of 1.0832 and the April high of 1.0885 (April 9). North of here is the March top of 1.0981 (March 8), ahead of the weekly peak of 1.0998 (January 11), all before the psychological threshold of 1.1000.

Looking south, a break of the 2024 bottom of 1.0601 (April 16) might signal a return to the November 2023 low of 1.0516 (November 1). Once this zone is passed, spot may challenge the weekly low of 1.0495 (October 13, 2023), ahead of the 2023 low of 1.0448 (October 3) and the round milestone of 1.0400.

The 4-hour chart shows a marked recovery in the pair. Against that, there is an immediate up-barrier at 1.0812, followed by 1.0885. Meanwhile, the 200-SMA at 1.0741 offers initial contention seconded by 1.0723. The relative strength index (RSI) improved past 60.