EUR/USD Forecast: Euro needs to clear 1.1380 to extend rally.

EUR/USD has gone into a consolidation phase after closing higher on Tuesday.The dollar selloff takes a break ahead of inflation data.EUR/USD needs to clear 1.1380 resistance to attract buyers.EUR/USD has advanced toward the upper limit of the range it has been trading within since late December but lost its bullish momentum early Wednesday. The selling pressure surrounding the greenback seems to have eased as investors shift their focus to December inflation data from the US. Nevertheless, the pair stays relatively close to 1.1380 resistance, which could open the door for additional gains if broken.

While responding to questions at his confirmation hearing on Tuesday, FOMC Chairman Jerome Powell refrained from clarifying a timeline for the beginning of the balance sheet reduction and forced US Treasury bond yields to edge lower.

“At some point perhaps later this year we will start to allow the balance sheet to run off and that’s just the road to normalizing policy,” Powell told the Senate. Reflecting the negative impact of Powell’s cautious tone on the greenback, the US Dollar Index (DXY) fell to its lowest level since November 30. 

Nonetheless, the DXY is staging a modest recovery early Wednesday and limiting EUR/USD’s upside for the time being. The Consumer Price Index (CPI) data later in the day could ramp up the volatility. Investors expect the CPI to rise to 7% on a yearly basis from 6.8% in November. A stronger-than-expected print could help the dollar regather its strength as Powell acknowledged that they need to focus “a little more on inflation goal than maximum employment goal.”

On the other hand, a soft inflation figure could cause investors to continue to price a delay in balance sheet reduction and trigger another leg higher in EUR/USD.EUR/USD Analysis On the four-hour chart, the Relative Strength Index (RSI) indicator declined below 60, pointing to a loss of bullish momentum in the near term. 

On the downside, 1.1340 (previous resistance, 20-period SMA) aligns as first support and sellers could come back into play if a four-hour candle closes below that level. 1.1320 (100-period SMA) and 1.1300 (200-period SMA, psychological level) could be seen as the next support levels. In case the pair manages to climb above 1.1380 (static level) and starts using it as support, 1.1400 (psychological level) could be targeted before 1.1440 (static level).

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