The EUR/USD bounce has entered its second week, led by a weaker U.S. dollar, and has further to run technically.
In the bigger picture, this is a healthy correction in the primary downtrend.
The outlook for interest rate differentials remains supportive of the USD in the longer term. The Federal Reserve is on track to taper this year despite moderating U.S.
economic growth, as inflationary and wages pressures build nL1N2RG2BX.
In Europe, inflationary pressure is seen as transitory nW1N2LK03OnF9N2PW017and the European Central Bank is about to lose its most prominent hawk nL8N2RG2LK.
Yet there are short-term negatives for U.S. growth expectations and potentially the USD. Supply chain issues, a major contributor to inflationary pressures, appear set to persist for longer than initially thought nL1N2RF2LD.
While the market is confident that President Joe Biden will deliver a stimulus package, uncertainty over its size, composition and timing could undermine confidence nL1N2RG2VD.
Technically the short-term EUR/USD outlook is positive, though the primary downtrend since May remains in place. Since mid-July, EUR/USD has swung between the upper and lower 21-day Bollinger bands four times, pivoting around the 21-day moving average.
EUR/USD rejected the lower band in early October and closed above the 21-DMA on Tuesday.
The break was sustained on Wednesday, suggesting that the next move is a test of the falling upper band, at 1.1726 on Thursday.
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