EUR/USD Outlook: Bullish potential intact, seems poised to reclaim 1.0900 mark

  • EUR/USD touches its highest level since April 21, though lacks follow-through buying.
  • A softer risk tone underpins the safe-haven USD and acts as a headwind for the major.
  • The fundamental backdrop still favours bulls and supports prospects for further gains.

The EUR/USD pair surrenders its intraday gains to the highest level since April 21 and retreats to the lower end of its daily range during the early European session on Monday. The US Dollar stages a modest recovery from a seven-month low and turns out to be a key factor acting as a headwind for the major. Investors remain concerned about the economic headwinds stemming from the worst COVID-19 outbreak in China. Apart from this, the protracted Russia-Ukraine war has been fueling worries about a deeper global economic downturn and keeping a lid on the optimism in the markets. This, in turn, draws some haven flows towards the greenback and caps the upside for the major.

That said, any meaningful USD recovery still seems elusive amid speculations that the Fed may be nearing the end of its rate-hike cycle. Market players now seem convinced that the US central bank will soften its hawkish stance amid signs of easing inflationary pressures. The bets were reinforced by the US consumer inflation figures released last week, which showed that the headline CPI fell for the first time in more than 2-1/2 years in December. Moreover, several FOMC members also backed the case for a smaller 25 bps rate hike in February. Apart from this, the recent hawkish rhetoric from several European Central Bank (ECB) policymakers could lend support to the EUR/USD pair.

The aforementioned fundamental backdrop suggests that the path of least resistance for the major is to the upside and any meaningful slide might still be seen as buying opportunity. There isn’t any major market-moving economic data due for release from the Eurozone on Monday and the US markets will be closed in observance of Martin Luther King Jr. Day. This further warrants some caution for bearish traders and positioning for a deeper corrective pullback, at least for the time being.

Technical Outlook

From a technical perspective, last week’s sustained breakout through the 1.0730-1.0740 supply zone was seen as a fresh trigger for bulls. Furthermore, the occurrence of the golden cross (50-day SMA moving above 200-day SMA) adds credence to the near-term positive outlook for the EUR/USD pair. That said, a slightly overbought RSI (14) on the 4-hour chart is holding back traders from positioning for any further gains. Nevertheless, spot prices remain on track to prolong the recent upward trajectory and reclaim the 1.0900 mark. The momentum could get extended further towards the April 2022 swing high, around the 1.0935 region.

On the flip side, the 1.0800 round-figure mark now seems to protect the immediate downside. Any further pullback is more likely to attract fresh buyers and remain limited near the 1.0740-1.0730 resistance breakpoint, now turned support. That said, a convincing break below might prompt some technical selling and make the EUR/USD pair vulnerable to weaken further below the 1.0700 mark. Spor prices could then slide to test the 1.0650-1.0645 support zone. The latter should act as a pivotal point, which if broken decisively should pave the way for a fall towards the 1.0600 mark before the pair eventually drops to the 50-day SMA, currently around the 1.0500 psychological mark.