EUR/USD Daily Forecast – Euro Falls Back to Retest 200-Day Moving Average

In yesterday’s daily forecast, I made a case that the upward momentum in EUR/USD should theoretically slow. This was based on expectations of a recovery in the equity markets after Powell’s speech on Friday, as well as comments from other central banks that suggested several central banks around the world are ready to ease monetary policy to help combat the negative economic impact of the Coronavirus.

EUR/USD continued to climb higher in the North American session, nearly breaking to fresh highs for the year. Nevertheless, I continue to hold the same view, that the upside from here is likely to be limited.

The two main reasons are that the rebound in equities since yesterday confirms that risk sentiment is shifting, at least for now. Further, it remains unclear if the Federal Reserve will cut rates to the extent that markets are pricing in.

The latest data from the CME shows a 50 basis point cut is still fully priced in for later this month. In addition to that, the markets are putting an 85% probability that the Fed will cut at least once more by June. I am speculating the Fed will not ease policy that aggressively simply based on their past tendencies in the last five years or so. Recall in 2014 when it became clear the US economy was in good shape for a rate increase, and how long it took for the Fed to pull the trigger on the first quarter-percent rate hike.

The counter-argument, of course, is that if the Fed does deliver on an aggressive 75-100 basis point hike over the next few months, the euro stands to rally on the interest rate differential alone.

Technical Analysis

EUR/USD made a notable upward break yesterday above its 200-day moving average. It also scaled above its 100-day moving average and a horizontal level at 1.1074.

From a technical perspective, there is little reason to be bearish unless the pair falls back below the above-mentioned technical areas. Realistically, it might take a drop below 1.1000 to shift the sentiment to bearish.

For the session ahead, strong support is seen at 1.1074. If the pair fails to hold above it, it could be taken as an early signal for a reversal.

If EUR/USD regains upward momentum and takes out yesterdays high, the next area of resistance is found at 1.1225 which is a price point that held the pair lower in late December.

Bottom Line

• EUR/USD has eased lower after nearly hitting a one-month high at the European close on Monday.
• Bulls will want to see the pair hold above 1.1074 in the session ahead to maintain the recent upward momentum.