EUR/USD Forecast: With many boosters, overbought conditions may be only a temporary speed bump

• EUR/USD has been extending its gains to above 1.12 amid opening optimism and stimulus hopes. 
• Speculation about the ECB and top-tier US figures are eyed.
• Thursday's four-hour chart is pointing to overbought conditions. 

Is the only way up? Perhaps, yet the rapid pace of gains suggests a temporary correction may be on the cards.

One potential trigger for such a correction may come from fraught talks between Germany's coalition partners. Chancellor Angela Merkel's center-right CDU party has so far failed to agree on the details of a €100 billion stimulus package with her center-left SPD. If another meeting – perhaps shorter than the nine-hour previous one – is also inconclusive – the common currency could fall. However, previous prolonged negotiations eventually ended in an agreement. 

On the other hand, investors are growingly bullish on stimulus from the European Central Bank. The Frankfurt-based institution is forecast to expand its Pandemic Emergency Purchase Program (PEPP) which currently stands at €750 billion. Estimates from an additional €250 billion to €500 billion. 

See ECB Preview: Lagarde's lavishness to set the tone for EUR/USD, three scenarios and what to watch

Printing more money tended to weaken the underlying currency, but that is not the case in the coronavirus era – additional funds mean a quicker economic recovery, especially for the hardest-hit countries such as Italy and Spain.

And in both these large southern nations, disease-related developments have been encouraging. Rome is set to further remove restrictions, including the obligation for incoming visitors to quarantine. Spain reported two consecutive days without COVID-19 mortalities, albeit amid discrepancies between central and regional authorities.

Germany's Reproduction indicator dropped below 1 after temporarily moving above this level and cafes in Paris are reopening. Overall, coronavirus seems to be coming under control, supporting the common currency. 

Markit's final Services Purchasing Managers' Indexes for May will likely confirm the dire, yet improving conditions. Investors are already eyeing June's figure.

US unrest to result in more stimulus?

Protests against racial discrimination continued for another day in America, yet with a calmer tone. While demonstrators violated curfews in several cases, the marches were mostly peaceful, and also President Donald Trump toned down his rhetoric, retreating from threats to bring in the military. 

The unrest has pushed lawmakers on Capitol Hill to accelerate talks for another relief package – probably below $3 trillion that Democrats pushed for, but potentially above the $1 trillion mark. 

The mass gatherings in demonstrations and other reopenings that have come amid political pressure and without substantial falls in cases suggest the US is still at risk of experiencing a second wave. However, that may take time to materialize and investors remain optimistic about the return to normal. 

Hope and the Federal Reserve's stimulus are boosting stocks and weighing on the safe-haven dollar. 

Is the world's largest economy recovering? Two significant releases await investors. ADP's private-sector jobs report is forecast to show a loss of nine million jobs in May – a horrible outcome, but an improvement in comparison to April.

ADP Preview: Half as bad as April is still terrible but markets have moved on

Later on, the ISM Non-Manufacturing PMI also carries expectations for improvement, yet it will likely remain below 50 – representing concentration. The employment component serves as a hint toward Friday's Non-Farm Payrolls.

ISM Non-Manufacturing PMI Preview: If the bottom is in, is this higher?

Overall, there is room for further gains, albeit with a temporary retreat.

EUR/USD Technical Analysis

The Relative Strength Index on the four-hour chart is above 70 – indicating overbought conditions and suggesting a drop. Nevertheless, EUR/USD broke above the uptrend channel and trades above the 50, 100, and 200 Simple Moving Averages, suggesting a broader uptrend. 

Beyond the daily high of 1.1215, the next cap is at 1.1240, a swing high from March. It if followed only by 1.1360, a stepping stone on the way down back then, and then by 1.1410.

Some support is at 1.1165, the daily low, followed closely by 1.1150, a swing high in March. The next lines to watch are 1.1070 and 1.1035. 

See Fibonacci lines are golden, a gold trading idea, and more – Interview with Chris Svorcik