• The dollar weakened after a two-day rally as investors took profits.

• The recent rally in the dollar started when the US released upbeat employment data.

• Traders are placing a 21.5% probability that the Fed will cut rates in March.

The EUR/USD forecast was bullish as the dollar weakened after a two-day rally with investors taking profits. However, analysts believe the pullback in the dollar is only technical as the price retraces the recent surge. Notably, fundamentals still support a stronger dollar.

The recent rally in the dollar started when the US released upbeat employment data. The figures came in much higher than expected, indicating a strong labor market. Consequently, the dollar surged as bets for Fed rate cuts plunged. Moreover, the jobs report brought to light the fact that the US economy still needs high rates to cool demand.

Furthermore, Powell fueled the dollar rally with comments that dimmed hopes for a March rate cut. He said there was still no clear evidence that inflation will consistently drop to the 2% target. Therefore, the Fed will likely not rush to lower interest rates.

Currently, traders are placing a 21.5% probability that the Fed will cut rates in March. This significantly declined from the 68.1% probability when the year began.

Meanwhile, policymakers are also pushing back on rate cut expectations in the Eurozone. ECB’s Isabel Schnabel has called for patience regarding rate cuts. According to her, the ECB should go slow on reducing interest rates as there is a chance that inflation might flare up. Moreover, tensions in the Red Sea could lead to a spike in oil prices that might increase inflation.

EUR/USD key events today

The pair will probably drift as there won’t be any high impact releases from the Eurozone or the US.

EUR/USD technical forecast: Price dips below 1.0800 support, ending consolidation

On the charts, the EUR/USD price has finally broken below the 1.0800 support level, ending a period of consolidation. As a result, the price has made a lower low, indicating the continuation of the bearish trend. At the same time, the RSI made a new low near the oversold level, showing solid bearish momentum.

However, the decline has paused, allowing the price to retrace the recent move. Given the bearish bias, it will likely respect the 30-SMA and the 1.0800 resistance levels and bounce lower for a new low. The next target for the downtrend is at the 1.0701 support.

https://www.forexcrunch.com/blog/2024/02/07/eur-usd-forecast-dollar-retreats-following-two-day-rally/