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EUR/USD Price Forecast: Next target comes at 1.1275

  • EUR/USD could not hold to initial gains past the 1.1200 barrier.
  • The US Dollar staged a notable comeback from the area of YTD lows.
  • Chinese-led risk-on rally seems to have lost shine on Wednesday.

EUR/USD rose to a fresh 2024 high around 1.1215 on Wednesday, although it surrendered all of that move afterwards, ending the session around the 1.1130-1.1120 band.

The pair largely faded Tuesday’s strong uptick, which came on the back of the widespread rebound led by news of extra stimulus by the PBoC.

On the USD side, the US Dollar Index (DXY) approached, and rebounded from, the area of 14-month lows near 100.20 on quite a change of heart from investors, which was also underpinned by the decent bounce in US yields across different maturities.

Meanwhile, when looking at the broader monetary policy scenario, market participants continued to price in further easing by the Federal Reserve (Fed) at both its November and December gatherings, all against the backdrop of firm prospects of a soft landing of the US economy.

Following the FOMC meeting, it remains unclear whether the size of the September interest rate cut will be repeated. The updated 'dot plot' indicates an additional 50 basis points of easing this year. Moreover, the Fed's statement and Chair Powell emphasized that the 50-basis point cut was not a response to panic.

Switching to the European Central Bank (ECB), it is important to note that the bank’s decision to ease monetary policy last week was influenced by its assessment of inflation and economic conditions. Although the ECB did not explicitly signal a rate cut for October, it acknowledged that domestic inflation remains elevated. ECB President Christine Lagarde stated that the diminishing impact of monetary policy restrictions should benefit the economy, with inflation expected to return to 2% by 2025, while maintaining a cautious outlook on further actions.

Looking ahead, if the Fed continues with additional rate cuts, the policy gap between the Fed and the ECB may narrow, potentially supporting EUR/USD. This scenario is plausible, especially as markets anticipate two more rate cuts from the ECB and between 100 and 125 basis points of easing from the Fed in the next 12 months.

However, the US economy is expected to outperform its European counterpart in the long run, which could limit any significant or prolonged weakness in the dollar.

EUR/USD daily chart

EUR/USD short-term technical outlook

Further EUR/USD gains are expected to face first resistance at the 2024 high of 1.1214 (September 25), seconded by the 2023 top of 1.1275 (July 18).

The pair's next downward target is the September low of 1.1001 (September 11), which is bolstered by the temporary 55-day SMA, and comes ahead of the weekly low of 1.0881 (August 8). The critical 200-day SMA is at 1.0872, prior to the weekly low of 1.0777 (August 1) and the June low of 1.0666

Meanwhile, the pair's rising trend is expected to continue as long as it is above the important 200-day SMA.

The four-hour chart shows a revival of the bearish bias. The initial resistance level is 1.1214, followed by 1.1275. On the other hand, initial contention aligns at 1.1121, followed by 1.1083, and 1.1068. The relative strength index (RSI) collapsed below 47.

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Author

Pablo Piovano

Born and bred in Argentina, Pablo has been carrying on with his passion for FX markets and trading since his first college years.

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