EUR/USD Forecast: Bears aren't ready to give up yet as Eurozone CPI, US macro data looms

The EUR/USD pair struggles to capitalize on the previous day's bounce from the 1.0635 area, or its lowest level since March 20, and oscillates in a narrow trading band through the Asian session on Thursday. Softer consumer inflation readings out from France and Germany on Wednesday dented European Central Bank (ECB) rate hike expectations, which, in turn, is seen acting as a headwind for the shared currency. In fact, the headline CPI in France fell from the 6.9% YoY rate to 6.0% in May, missing consensus estimates. Furthermore, the German CPI also fell short of market expectations and decelerated to the 6.1% YoY rate in May from 7.2% previous, relieving pressure on the ECB to continue raising interest rates.

That said, a slew of ECB officials back the case for additional rate hikes in the coming months. In fact, ECB Vice President Luis de Guindos said that victory over inflation is not there yet. Separately, ECB policymaker Madis Muller said that core inflation is showing no signs of slowing and it is very likely that the central bank will hike by 25 bps more than once. This comes on the back of comments by ECB Governing Council Gediminas Šimkus on Tuesday, who said he expects a 25 bps lift-off in both June and July. Apart from this, subdued US Dollar (USD) demand – amid diminishing odds for another 25 bps rate hike in June – lends some support to the EUR/USD pair and helps limit the downside.

In fact, Federal Reserve (Fed) Governor Philip Jefferson said on Wednesday that pausing rate hikes at the next FOMC meeting would offer time to analyse more data before making a decision about the extent of additional tightening. He added that a pause does not mean that rates have peaked. Furthermore, Philadelphia Fed President Patrick Harker favoured pausing at the next meeting, though warned that incoming data may change his mind. Apart from this, the recent progress towards averting an unprecedented US debt default, with the US House of Representatives voting in favour of a bill about the debt ceiling late Wednesday, keeps the USD below its highest level since mid-March touched on Wednesday.

Still, worries about a global economic slowdown, particularly in China, and a pickup in the US Treasury bond yields act as a tailwind for the Greenback, capping the upside for the EUR/USD pair. Market participants look to the release of the flash Eurozone CPI print for a fresh impetus. In the early North American session, traders will take cues from the US economic docket, featuring the ADP report on private-sector employment and the ISM Manufacturing PMI. This, along with Fedspeaks, the US bond yields and the broader risk sentiment, will influence the USD price dynamics and provide trading opportunities ahead of the US NFP report on Friday.

Technical Outlook

From a technical perspective, the recent breakdown and acceptance below the 61.8% Fibonacci retracement level of the March-May rally favour bearish traders. That said, the Relative Strength Index (RSI) on the daily chart has moved on the verge of breaking into the oversold territory and warrants some caution. This makes it prudent to wait for some near-term consolidation or a modest bunce before positioning for an extension of a nearly one-month-old retracement slide over a one-year higher touched in May.

Nevertheless, the EUR/USD pair seems vulnerable to weaken further below the overnight swing low, around the 1.0635 region, and test the 1.0600 round-figure mark. Some follow-through selling should pave the way for deeper losses and drag spot prices to the 1.0570-1.0565 intermediate support. The downward trajectory could get extended further towards the March swing low, just ahead of the 1.0500 psychological mark.

On the flip side, 61.8% Fibonacci level, around the 1.0735-1.0740 region, is likely to act as an immediate hurdle, which if cleared might trigger a short-covering move. The EUR/USD pair might then climb to the 1.0800 confluence, comprising of the 100-day Simple Moving Average (SMA) and the 50% Fibonacci level. The latter should act as a pivotal point. A sustained strength beyond this threshold is likely to shift the near-term bias in favour of bullish traders.