EUR/USD Forecast: Extra gains need to clear the 200-day SMA

A resurgence of bearish sentiment in the US Dollar (USD) prompted a strong response in EUR/USD, pushing it towards multi-day tops north of 1.0800 the figure at the beginning of the week.

The Dollar's pullback coincided with a widespread negative session in US yields across various maturities, always against the unchanged macro environment, which continues to see the Federal Reserve (Fed) beginning its easing cycle in September vs. an earlier start of interest rate cuts by the European Central Bank (ECB), probably in June.

In reference to the latter point, CME Group’s FedWatch Tool sees the probability of lower interest rates in the US in September at nearly 65%.

Still around the Fed, FOMC Governor Phillip Jefferson advocated earlier in the day for the continuation of the current monetary policy stance until there were clear signs that price pressures were moderating towards the Fed’s 2% goal. Speaking about inflation, the release of the Producer Prices Index (PPI) and the Consumer Price Index (CPI) later in the week could shed further light on the potential timing of the Fed’s start of its rate-cut programme.

Looking ahead, any temporary weakness in the Dollar is anticipated to be brief due to postponed expectations of a potential Fed interest rate cut later in the year.

Meanwhile, the unchanged monetary policy environment highlights the contrast between the Federal Reserve and other G10 central banks, notably the European Central Bank (ECB).

Regarding the ECB, recent statements from policymakers have suggested an increasing likelihood of the bank starting its easing programme in June, although uncertainties persist regarding the ECB’s future decisions beyond the summer. On this note, de Guindos remarked earlier on Thursday that the ECB is cautious about predicting any trend beyond June.

Looking forward, the relatively subdued economic fundamentals in the Eurozone, coupled with the resilience of the US economy, support expectations for a stronger Dollar in the medium term, especially considering the growing likelihood of the ECB cutting rates well before the Fed.

With this perspective in mind, the potential for further weakness in EUR/USD should be considered in the medium term.

EUR/USD daily chart

EUR/USD short-term technical outlook

On the upside, EUR/USD is likely to face first resistance at the May high of 1.0812 (May 3), which comes before the intermediate 100-day SMA of 1.0827 and the April top of 1.0885 (April 9). North of here is the March peak of 1.0981 (March 8), which precedes the weekly high of 1.0998 (January 11), all before the psychological 1.1000 yardstick.

Looking south, a break below the May low of 1.0649 (May 1) could put the 2024 bottom of 1.0601 (April 16) back on the radar prior to the November 2023 low of 1.0516 (November 1). Once this zone is breached, spot may test the weekly low of 1.0495 (October 13, 2023), ahead of the 2023 bottom of 1.0448 (October 3) and the round milestone of 1.0400.

The 4-hour chart shows a persistent move higher so far. Against that, there is an immediate upward obstacle at 1.0812, seconded by 1.0885. Meanwhile, initial contention comes at the 200-SMA at 1.0737 followed by 1.0723. The relative strength index (RSI) dropped to around 60.