EUR/USD Forecast: Euro correction attempts to remain limited

• EUR/USD has retreated modestly following Thursday's impressive rally.
• Near-term technical outlook points to overbought conditions for the pair.
• Dovish Fed commentary could make it difficult for the US Dollar to find demand.

EUR/USD has retreated to the 1.0850 area early Friday after having touched its highest level since April at 1.0868 late Thursday. The near-term technical outlook suggests that the pair could stage a technical correction before the next leg higher but losses are likely to remain limited.

The data published by the US Bureau of Labor Statistics revealed on Thursday that annual inflation in the US, as measured by the Consumer Price Index (CPI), declined to 6.5% in December from 7.1% in November as expected. The Core CPI, which excludes volatile food and energy prices, fell to 5.7% from 6%. Both of these readings came in line with analysts' estimates and the US Dollar Index fluctuated wildly while market participants tried to figure out how these data would influence the Federal Reserve's rate outlook.

Dovish comments from Fed officials, however, made sure that investors continued to move away from the US Dollar. 

Federal Reserve Bank of Philadelphia President Patrick Harker said that it was time for future Fed rate hikes to shift to 25 basis points increments. Similarly, Atlanta Federal Reserve Bank President Raphael Bostic noted he was comfortable with a 25 bps increase at the next meeting.

On the flip side, European Central Bank (ECB) policymaker Martins Kazaks said that there was no rationale for markets to bet on a rate cut and added that rates should rise well into the restrictive territory.

While the Fed is now widely expected to ease on policy tightening moving forward, ECB policymakers try to make sure that markets understand their commitment to the hawkish outlook. Hence, the fundamental side of the story doesn't point to a steady decline in EUR/USD, at least in the near term.

Later in the session, the University of Michigan's Consumer Sentiment Survey will be featured in the US economic docket. Unless there is a significant increase in the one-year and five-year ahead inflation expectations components of the survey, the US Dollar is likely to stay on the back foot. It's worth noting, however, that profit-taking ahead of the weekend could cap the pair's upside.

EUR/USD Technical Analysis

Static resistance for the pair seems to have formed at 1.0870. Once the pair rises above that level, it is likely to rise toward 1.0900 (psychological level) and target 1.0970 (static level from March 2022, former support).

On the downside, 1.0800 (psychological level, static level) aligns as first support before 1.0770 (20-period Simple Moving Average (SMA)), 1.0725 (static level) and 1.0700 (psychological level).

Meanwhile, the Relative Strength Index (RSI) indicator on the four-hour chart stays well above 70, pointing to overbought conditions.