EUR/USD Forecast: Short-term Consolidation Continues

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The US Dollar (USD) alternated gains and losses on Wednesday, leading the USD index (DXY) to end the session almost unchanged from the previous day’s closing levels. This price action in the dollar prompted the EUR/USD to hover around the 1.0820 region, rising marginally on the day as investors digested Federal Reserve Chairman Jerome Powell’s second testimony before Congress.

While Powell’s message largely aligned with his previous comments, he suggested that he was not yet ready to conclude that inflation was sustainably declining to 2%, although he expressed “some confidence” that it was heading in that direction. Following Powell’s testimony, the macroeconomic environment remained relatively stable on both sides of the Atlantic.

That is to say, while the European Central Bank (ECB) is contemplating further rate cuts beyond the summer, with market expectations suggesting two additional cuts by the end of the year, there is an ongoing debate among investors about whether the Fed will implement one or two rate cuts this year, despite the Fed’s current projection of a single cut, likely in December. The ECB’s rate cut in June, combined with the Fed’s decision to maintain rates, has widened the policy divergence between the two central banks. This divergence could potentially lead to greater weakness of the EUR/USD in the short term.

Short-term Technical Outlook for EUR/USD

The EUR/USD is expected to find its first upside barrier at the July peak of 1.0845 (8 July), followed by the weekly high of 1.0852 (12 June) and the June high of 1.0916 (4 June). If the pair breaks above this level, it could bring the March peak of 1.0981 (8 March) back into focus, followed by the psychological mark of 1.1000.

If the bears regain control, the pair could approach the 200-day SMA at 1.0800 before falling to a low of 1.0666 on 26 June. From here, the May low of 1.0649 (1 May) leads to the 2024 bottom of 1.0601 (16 April). Looking at the bigger picture, additional gains are expected if the significant 200-day SMA is consistently surpassed.

So far, the 4-hour chart shows a gradual recovery. The 200-day SMA at 1.0783 provides initial containment, followed by the 55-day SMA at 1.0781 and finally 1.0709. On the upside, the initial hurdle is at 1.0845, followed by 1.0852 and 1.0902. The Relative Strength Index (RSI) has decreased to around 53.