EUR/USD Forecast: Euro looks to extend recovery, ECB stays in the way

EUR/USD has gathered bullish momentum on broad USD weakness.
Risk flows help the shared currency find demand.
Dovish ECB commentary could limit the pair’s recovery.
The EUR/USD pair has managed to close the first day of the week in the positive territory and gathered bullish momentum on Tuesday with the dollar struggling to find demand amid risk-on flows.

However, it’s still too early to say that the shared currency has regained its footing against the dollar, especially with the European Central Bank (ECB) policymakers reassuring that they will continue to support the economic recovery. Nevertheless, EUR/USD seems to have steadied around the mid-1.1600s during the European session.

ECB Governing Council member Francois Villeroy de Galhau noted on Tuesday that there is no reason for the ECB to consider a rate hike between now and the end of next year. Additionally, Villeroy reiterated that they expect the overall inflation to return below 2% by end-2022. On a similar note, “monetary policy will remain accommodative, will look through price pressures if something remains,” said ECB Governing Council member Ignazio Visco on Monday.

In the meantime, the greenback stays vulnerable to fluctuations in the US Treasury bond yields.

With the benchmark 10-year US Treasury bond yield losing more than 1% following a two-day rally, the US Dollar Index fell to multi-week lows around 93.60, helping EUR/USD preserve its bullish momentum.

Later in the day, September Housing Starts and Building Permits from the US will be looked upon for fresh impetus but these data are unlikely to have a noticeable impact on the dollar’s market valuation. Moreover, market participants will keep a close eye on the Fedspeak and look for a tapering confirmation in November.

EUR/USD technical analysis
The bullish shift in the near-term technical outlook is becoming apparent on the four-hour chart with the 20-period SMA crossing above the 100-period SMA. However, the Relative Strength Index (RSI) indicator on the same chart has moved above 70 for the first time since early September, suggesting that the pair could stage a technical correction before the next leg up.

The initial support is located at 1.1620 (the Fibonacci 23.6% retracement of the downtrend that started in early September) and as long as buyers defend this level, EUR/USD could aim for 1.1670 (Fibonacci 38.2% retracement) and 1.1690/1.1700 (200-period SMA, psychological level).

On the downside, a daily close below 1.1620 is likely to cause the pair to retreat toward 1.1600 (psychological level, 100-period SMA, Fibonacci 23.6% retracement) and 1.1550 (50-period SMA).