EUR/USD Forecast: Euro needs to stabilize above 1.0700 to attract bulls

• EUR/USD has turned south and declined below 1.0700 early Tuesday.
• Markets try to figure out whether SVB collapse will influence ECB's rate decision.
• Investors await February inflation data from the US.

Following Monday's upsurge, EUR/USD has lost its traction and retreated below 1.0700 early Tuesday. The US Dollar's reaction to the February inflation data is likely to drive the pair's action later in the day.

The sharp decline witnessed in the US Treasury bond yields weighed heavily on the US Dollar (USD) on Monday and allowed EUR/USD to preserve its bullish momentum. After having touched its highest level in a month at 1.0750, however, the pair staged a downward correction as Wall Street's main indexes managed to recover from opening lows on hopes of contagion from Silicon Valley Bank collapse remaining contained.

Early Tuesday, the US Dollar Index clings to modest recovery gains and doesn't allow the pair to regain its traction. Later in the session, the Consumer Price Index (CPI) in the US is forecast to decline to 6% on a yearly basis in February from 6.4% in January. The Core CPI, which excludes volatile food and energy prices, is expected to match January's print by coming in at 0.4% on a monthly basis.

According to the CME Group FedWatch Tool, Markets are currently pricing in a 58% probability of a 25 basis points (bps) Fed rate hike, compared to a 42% chance of a no action, at the upcoming FOMC meeting. A softer-tnan-expected monthly core inflation print could revive expectations for the Fed to keep its policy rate unchanged in response to SVB turmoil and cause the USD to weaken against its rivals. 

On the other hand, a Core CPI at-or-above 0.5% should provide a boost to the USD and weigh on EUR/USD as it would likely suggest that the Fed may be forced to take action to continue its battle against inflation.

US Inflation Preview: Five scenarios for trading the Core CPI whipsaw within the SVB storm.

Meanwhile, markets are also trying to figure out whether SVB collapse will influence the European Central Bank's (ECB) rate decision later this week. Bloomberg reported on Monday that the ECB's intention to go for a 50 bps rate increase was likely to meet stronger opposition from policymakers. Nevertheless, ECB) policymaker Yannis Stournaras said on Tuesday that he does not see any impact from the collapse of Silicon Valley Bank (SVB) on Eurozone banks. Although the ECB is in quiet period, the Euro could stay resilient against its rivals in case other ECB policymakers deliver similar comments.

EUR/USD Technical Analysis

EUR/USD retreated below 1.0700, where the 200-period Simple Moving Average (SMA) on the four-hour chart is located. Meanwhile, the Relative Strength Index (RSI) indicator on the same chart edged lower to 60. In case the pair manages to rise above that level and stabilize there, buyers could show interest and open the door for another leg higher toward 1.0750 (Monday high) and 1.0800 (static level, psychological level).

On the downside, 1.0660 (static level) aligns as first support ahead of 1.0640 (ascending trend line) and 1.0620 (50-period SMA, 100-period SMA).