EUR/USD Outlook: 200-hour SMA around 1.0850 holds the key for bulls ahead of US PCE

• EUR/USD drifts lower for the second successive day on Friday amid a modest USD strength.
• Thursday’s upbeat US macro data fuels hawkish Fed expectations and underpins the buck.
• A positive risk tone could act as a headwind for the USD and limit the downside for the pair.
• Traders eye the US PCE data for some impetus ahead of the FOMC/ECB meetings next week.

The EUR/USD pair edges lower for the second successive day on Friday and moves away from its highest level since April 2022 touched the previous day. The US Dollar draws support from the mostly upbeat US macro data released on Thursday, which, in turn, is seen as a key factor exerting some pressure on the major. In fact, the US Commerce Department, in its Advance fourth-quarter GDP growth estimate, reported that the economy expanded at a 2.9% annualised pace against consensus estimates for a reading of 2.6%. A separate report showed that the US Initial Jobless Claims unexpectedly dropped to 186K during the week ended January 21 from 192K previous.

Furthermore, the headline Durable Goods Orders smashed expectations and grew 5.6% in December, though orders excluding transportation items fell -0.1% MoM. Nevertheless, the data points to an economy that is continuing to show resilience despite the rapid rise in borrowing costs and backs the case for the Federal Reserve to maintain its hawkish stance for longer. This leads to a further recovery in the US Treasury bond yields and is seen underpinning the greenback. The robust economic indicators, meanwhile, boost investors' confidence and acts as a headwind for the safe-haven greenback, which could lend some support to the EUR/USD pair, at least for now.

Apart from this, expectations for a more hawkish European Central Bank (ECB) should further contribute to limiting deeper losses. It is worth recalling that several ECB officials supported additional jumbo rate hikes in the coming months to combat stubbornly high inflation. Hence, it will be prudent to wait for strong follow-through selling before confirming that the EUR/USD pair has formed a near-term top and positioning for any meaningful corrective decline. Traders might also prefer to wait on the sidelines ahead of the Fed's preferred inflation gauge - the Core PCE Price Index. This might influence the USD price dynamics and provide a fresh impetus.

The market focus, however, will remain glued to the key central bank event risks next week. The Fed will announce its policy decision at the end of a two-day meeting on Wednesday. This will be followed by the ECB monetary policy meeting on Thursday, which, in turn, will play a key role in determining the next leg of a directional move for the EUR/USD pair.

Technical Outlook

From a technical perspective, the 200-hour SMA, currently around the mid-1.0800s, is likely to protect the immediate downside and act as a pivotal point for intraday traders. A convincing break below might prompt some technical selling and drag the EUR/USD pair further towards the 1.0800 round-figure mark. This is closely followed by support near the 1.0780-1.0775 horizontal resistance breakpoint. Failure to defend the said support levels could expose the next relevant support near the 1.0700 mark.

On the flip side, the 1.0900 mark now seems to act as an immediate hurdle ahead of the multi-month peak, around the 1.0925 region. Some follow-through buying beyond the April 2022 peak, around the 1.0935 area, will be seen as a fresh trigger for bulls and allow the EUR/USD pair to reclaim the 1.1000 psychological mark. The momentum could get extended further towards the 1.1070 intermediate resistance en route to the 1.1100 round figure.