EUR/USD Forecast: Euro poised for correction before next leg higher

EUR/USD has extended its rally to a fresh multi-month high.
Near-term technical outlook suggests that the pair could stage a downward correction.
Next significant resistance could be seen at 1.1530.

Eren Sengezer FXStreet

EUR/USD has capitalized on the broad-based selling pressure surrounding the dollar and advanced to its highest level since November 11 near 1.1480. The near-term technical outlook suggests that the pair might stage a technical correction before targeting new multi-month highs.

After the data published by the US Bureau of Labor Statistics revealed that the Consumer Price Index (CPI) rose to 7% on a yearly basis in December, the greenback suffered heavy losses against its rivals. Although the CPI print came in line with the market expectation, investors might have assessed it as a factor that would allow the Fed to remain patient with regard to balance sheet reduction.

Nevertheless, the US Treasury bond yields stayed relatively resilient despite the dollar selloff on Wednesday. Meanwhile, the CME Group's FedWatch Tool shows that markets are still pricing a 75% chance of a rate increase in March, suggesting that the US Dollar Index could look to set a bottom in the near term.

Later in the session, the Producer Price Index (PPI) data will be featured in the US economic docket. The market consensus points to an annual PPI reading of 9.8% in December. An above-expectation print could help the dollar show some resilience against its rivals. On the flip side, a decline in the PPI could open the door for further greenback weakness.

Additionally, Federal Reserve Governor Lael Brainard will appear before the Senate Banking Committee on Thursday for her nomination hearing to become the Fed Vice-Chair. Brainard's prepared remarks, which were released on Wednesday, showed that she will reiterate that the Fed's most important task will be controlling inflation.

EUR/USD Technical Analysis

The Relative Strength Index (RSI) indicator on the four-hour chart reached its highest level since August near 80 early Thursday. The last time the RSI was that high, the pair staged a technical correction and erased nearly 60 pips before regaining its traction.

Interim support seems to have formed at 1.1440 for the pair before 1.1400 (psychological level) and 1.1380 (former resistance). As long as these supports hold, buyers could remain interested in the shared currency.

On the upside, 1.1500 (psychological level) aligns as first resistance before 1.1530 (static level).

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Author

Eren Sengezer

FXStreet

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

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