EUR/USD Forecast: Mixed signals, but upside risks persist

• The US Dollar staged a modest rebound but continues to face pressure.
• Inflation in Spain and Germany slows more than expected.
• Despite the decline in the EUR/USD, the risk remains tilted to the upside.

The EUR/USD hit a fresh three-month high at 1.1016 but failed to hold above 1.1000 and pulled back, despite risk appetite. Inflation slowed further in Europe, while the US economy showed even stronger growth than previously reported during the third quarter. The Greenback remains vulnerable ahead of the US data.

In Germany, inflation, measured by the Consumer Price Index (CPI), declined to 3.2% on a yearly basis in November from 3.8% in October, below the market expectation of 3.5%. In Spain, the annual rate slowed from 3.5% to 3.2%. On Thursday, Eurostat will release Eurozone CPI. Also due are German Retail Sales and the Unemployment Rate.

If inflation from the Eurozone confirms what Spain and Germany data have already shown, it could fuel further speculation about rate cuts from the European Central Bank (ECB). However, ECB officials will want to see more data before turning decisively dovish, particularly as economists warn that inflation is likely to rebound in the next two months. In any case, it is welcomed news for the ECB.

Bond yields dropped on both sides of the Atlantic, with the most pronounced slide in Germany, where the 10-year bond yield fell to 2.43%, the lowest since early August.

Data released on Wednesday revealed that the US economy expanded in the third quarter at a 5.2% annualized rate, above the previously reported 4.9%. The number helped bolster the US Dollar as it served as reassurance about the performance of the US economy. However, the Beige Book later suggested that economic activity slowed in the period prior to November 18.

On Thursday, US data to be released includes the Core Personal Consumption Expenditures Price Index and the weekly Jobless Claims. Both reports are critical and could trigger more losses for the US Dollar if they show inflation slowing further and a softer labor market.

EUR/USD short-term technical outlook

The EUR/USD dropped after rising for four consecutive days, pulling back from a three-month high above 1.1000. Despite the retreat, the bias remains tilted to the upside. However, the Relative Strength Index (RSI) is currently above 70 and is about to turn downwards, suggestion some consolidation ahead. A daily close well above 1.1010 would open the doors for further gains.

On the 4-hour chart, the risk still seems tilted to the upside. The pair has found support at the 20-Simple Moving Average (SMA). A solid break below 1.0960 would suggest further losses ahead, with the next support at 1.0925, near an upward trendline. On the upside, the 1.1000 area presents resistance to be taken into account. Above recent highs, the next resistance level stands at 1.1050.

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