EUR/USD Forecast: Near-term attention remains on 1.0900

The US Dollar (USD) extended its recent decline, lending further legs to the risk complex and sponsoring another test of the 1.0870 region by EUR/USD on Monday.

In fact, the second consecutive daily advance in the pair came amidst further weakness in the Greenback in response to the inactivity on Memorial Day, although always against the backdrop of renewed speculation that the Federal Reserve (Fed) might maintain its restrictive stance longer than expected.

This speculation remains bolstered by the cautious tone of Fed policymakers, the strong health of the US economy, persistent inflation, and a tight labour market.

According to the CME Group’s FedWatch Tool, there is nearly a 50% probability of lower interest rates by September, down from over 60% during last week.

Returning to the ECB, Board member Villeroy contended that the bank possesses significant leeway for reducing rates and that the prevailing market anticipations for prolonged easing are justified. His counterpart, Rehn, noted that as inflation trends closer to the 2% objective, it becomes viable to ease monetary policy and initiate rate reductions in June. Furthermore, Lane suggested that the speed at which the ECB will lower interest rates will hinge on the resilience of underlying inflation and demand, affirming the bank's readiness to commence rate cuts as early as the following week.

Looking ahead, the relatively subdued economic fundamentals in the Eurozone, coupled with the resilience of the US economy, support the ongoing narrative of Fed-ECB policy divergence and lean towards a stronger Dollar in the long run. Considering the rising probability of the ECB reducing rates before the Fed, 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

Extra rebound could see EUR/USD revisit the May top of 1.0894 (May 16), seconded by the March peak of 1.0981 (March 8) and the weekly high of 1.0998 (January 11), all before reaching the important 1.1000 level.

On the downside, a breach of the 200-day SMA of 1.0787 may open the door to the May low of 1.0649 (May 1), ahead of the 2024 bottom of 1.0601 (April 16) and the November 2023 low of 1.0516 (November 1). Once this zone is cleared, the pair may go for the weekly low of 1.0495 (October 13, 2023), the 2023 bottom of 1.0448 (October 3), and the 1.0400 round milestone.

So far, the 4-hour chart indicates some short-term range bound. The nearest up-barrier is 1.0867, which comes prior to 1.0884 and 1.0894. Looking southwards, the 100-SMA at 1.0814 comes first, seconded by 1.0766 and the 200-SMA at 1.0748. The relative strength index (RSI) dropped to about 57.