EUR/USD Bounces off Two-Month Lows as Fed Expectations Flip

The EUR/USD pair recovered ground on Thursday after touching its lowest level in over two months the previous day as expectations surrounding the Federal Reserve decision shifted to dovish while investors cheered with optimism the US House of Representatives passing the debt-ceiling bill.

At the time of writing, the EUR/USD pair is trading at the 1.0750 zone, up 0.6% on the day and more than 100 pips above Wednesday's two-month low of 1.0635.

Market sentiment improved after the US House of Representatives passed the debt-ceiling bill on Wednesday, which now needs the Senate's green light.

However, the dollar took the hardest hit from dovish comments from Fed officials. Fed's Governor Philip Jefferson said a pause before more hikes later might allow the economy time to digest current tightening and avoid bank stress. His comments were echoed by Philadelphia Fed President Patrick Harker but defied by Cleveland Fed President, Loretta Mester, who said she saw no "compelling reason" to pause.

According to the CME FedWatch Tool, the probability of future rate hikes has flipped from previously showing odds favoring a 25 bps hike in June to over 70% odds the Fed will leave rates unchanged on June 14.

On Friday, investors will be watching the US nonfarm payroll report to assess the state of the labor market.

From a technical perspective, the EUR/USD pair maintains a negative short-term bias according to indicators on the daily chart, although the bearish momentum has eased a tad. 

The pair faces the next relevant resistance at the 1.0810-20 area, where the 20-day simple moving average (SMA) converges with the 100-day SMA, threatening to complete a death cross. Beyond that level, the EUR/USD perspective could improve, putting the 1.0900 area back on the radar.

On the other hand, the 1.0635 low stands as immediate support, followed by the 1.0600 psychological level.