EUR/USD Forecast: Unconvincing recovery as the focus shifts to the Fed

EUR/USD is extending its gains from late on Friday, but not going anywhere fast. The Italian coalition leaders Matteo Salvini and Luigi di Maio reached an agreement on a new budget with PM Giuseppe Conte.

The third-largest economy in the euro-zone will submit the new proposal to the European Commission, which has rejected previous budgets. A lower deficit may help convince Brussels, but further negotiations are more likely.

The common currency is still licking its wounds from the dovish comments by Mario Draghi. The President of the European Central Bank said that the "balance of risks is moving to the downside" in his post rate decision press conference on Thursday. This came as the Bank ended its bond-buying scheme. 

The focus now shifts across the pond to the Federal Reserve's all-important rate decision on Wednesday. The Fed is expected to raise rates in its last meeting of the year. However, there is growing uncertainty about the plans for 2019 — the most recent dot-plot from September points to three increases. However, some signs of a slowdown and a few dovish comments cause markets to rethink. 

Nevertheless, the most recent top-tier economic figure beat expectations. US Retail Sales, published on Friday, showed that Americans were on a shopping spree in November, the month that includes Black Friday. 

Speculation about the Fed is set to continue until the all-important event on Wednesday.

The economic calendar is light today, leaving room for Brexit speculation to have its say. The EU and the UK have not reached a new agreement on the Irish backstop that would satisfy Brexit hardliners in Parliament. The chances of a second referendum are rising, but PM Theresa May rejects these calls. Significant Brexit-related moves in the Pound tend to spill over to the Euro.

All in all, the dovish ECB and the Fed's ongoing tightening limit may limit any gains.

EUR/USD Technical Analysis

While the world's most popular currency pair is recovering, it is not out of the woods. Momentum is still marginally to the downside, and the Relative Strength Index (RSI) is not in oversold conditions, leaving room for falls. Also, EUR/USD trades below the 50 and 200 Simple Moving Averages.

Support awaits at 1.1305 which support the pair twice in recent weeks. The next line to watch also served twice: 1.1270 was the low point last week and also in late November. The 2018 trough at 1.1215 is next down the line. 

1.1335 was a swing low last week. 1.1350 is where the 50 SMA meets the price and a swing low in late November. 1.1380 was a peak in early December, and 1.1395 was the high point last week. 

More: EUR/USD faces fierce upside resistance – Confluence Detector