EUR/USD Forex Technical Analysis – Trend Up but Ripe for Reversal Following Test of 1.0770 – 1.0868 Resistance

The Euro is edging higher against the U.S. Dollar early Friday. Single-currency traders are buying on expectations of a sooner-than-expected rate hike by the European Central Bank (ECB). Meanwhile, the U.S. Dollar is being pressured by lower Federal Reserve rate hike expectations amid signs the central bank might slow or even pause its tightening cycle in the second half of the year.

At 05:15, the EUR/USD is trading 1.0756, up 0.0025 or +0.24%. On Thursday, the Invesco CurrencyShares Euro Trust settled at $99.28, up $0.42 or +0.42%.

Euro Lifted by Rate Hike Expectations

Earlier in the week, the Euro surged after European Central Bank President Christine Lagarde said Euro Zone interest rates will likely be in positive territory by the end of the third quarter.

Lagarde’s comments implied an increase of at least 50 basis points to the ECB deposit rate and fueled speculation of bigger hikes this summer to fight a surge in inflation tied to rising energy prices caused by the war in Ukraine and massive public-sector stimulus after the onset of the coronavirus pandemic.

Fed Minutes, US Economic Data Weigh on Dollar

The U.S. Dollar is being pressured after the Fed minutes were perceived as much less-hawkish than traders were expecting. The price action suggests traders may now be anticipating fewer rate hikes on the back of slowing economic growth.

Helping to fuel this assessment was weaker-than-expected GDP and jobless claims data on Thursday.

First-quarter gross domestic product declined at a 1.5% annual pace, worse than the 1.3% Dow Jones estimate and a writedown from the initially reported 1.4%, the Commerce Department reported Thursday.

Additionally, initial claims for the week-ending May 21 totaled 218,000, which was an increase from the previous period and slightly higher than the 215,000 estimate.

Technical Analysis

Technically speaking, the main trend is up according to the daily swing chart. A trade through 1.0354 will change the main trend to down. But since the market is up 10-sessions from its last main bottom, we’re likely to see a closing price reversal top before we see a change in trend.

The minor trend is also up. A trade through 1.0642 will change the main trend to down and shift momentum to the downside.

The short-term support zone is 1.0714 to 1.0645. The nearest resistance is the main retracement zone at 1.0770 to 1.0868.

Short-Term Forecast

Trader reaction to 1.0730 will likely determine the direction of the EUR/USD on Friday.

Bullish Scenario

A sustained move over 1.0730 will indicate the presence of buyers. The first upside target is the main 50% level at 1.0770.

Sellers could come in on the first test of 1.0770, but if the buying is strong enough to take it out, then look for the rally to possibly extend into the Fibonacci level at 1.0868. This is the last potential resistance before the 1.0936 main top.

Bearish Scenario

A sustained move under 1.0730 will signal the presence of sellers. If this creates enough downside momentum then look for the selling to possibly extend into the 50% level at 1.0645, followed by the minor bottom at 1.0642. This is a potential trigger point for an acceleration to the downside.