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The Euro is set to test key levels against the U.S. Dollar as its recovery from levels below parity extends, say analysts.

Karen Jones at the Society of Technical Analysts says EUR/USD is about to test its 55-day ma and downtrend at 1.0371/85.

"We have a mild buy signal on the daily DMI, which we have not seen since June," says Jones. "The market is turning at the base of its longer tern down channel and long term Fibo".

She says should a close above the downtrend occur we should see a stronger corrective move to 1.05 then 1.0636. (Watch full analysis below).

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The Euro recovered 0.84% agains the Dollar on Wednesday after U.S. inflation data came out below analyst expectations and the exchange rate has extended its gains on Thursday taking it back above 1.03 to 1.0336 at the time of writing.

Despite the Euro's recent advance against the Dollar, analysts at JP Morgan's London FX Desk say they are not yet ready to engage in 'short' Dollar positions.

"If the market needed some encouragement to buy risk, then it certainly got it yesterday, but we still find it hard to buy the single currency," says a note from the desk out August 11.

"Selling EURUSD towards 1.0350/70, has so far proved to be a sensible trade, although a break of this level would call for a short term reassessment. While not convinced that EURUSD will trade meaningfully higher from here, recent data will likely see a weaker USD over the next couple of sessions," the note adds.

The desk is neutral on the broader Dollar for now "but certainly acknowledge there could be some more cutting of deeper rooted positioning in the sessions to come".

U.S. inflation data surprised the market this week by coming in cooler than expected, triggering a rally in stocks and a decline in the U.S. Dollar, but analysts at Nordea Bank say this is not the beginning of a Dollar downtrend.

In fact analysts at the Scandinavian lender and investment bank expect the Euro to depreciate to well below parity over coming weeks as U.S. economic outperformance outshines those of European economies where recession is expected to take hold.

"The July inflation surprise, whereby US inflation rose less than expected, seems to be an appetiser of what will eventually come. But we believe we are far from a Fed pivot to dovish policy and thus not yet at the peak for the USD," says Jan von Gerich, Chief Analyst at Nordea Markets.

Furthermore, a litany of headaches could continue to keep markets nervous, creating the backdrop for further Dollar gains as investors seek out safety.

"It is clear that the global economy is losing momentum. Given the current headwinds, including little spare capacity, high energy prices and a war in Europe, continued Covid uncertainty and weakening real estate sector in China and elevated inflation, it is virtually unavoidable for the economy to survive unscathed. Further, amidst the current inflation problem, central banks are actively trying to hit the brakes in order to bring inflation down," says von Gerich.

EUR/USD is forecast by Nordea to fall below parity to bottom at around 0.97 at the turn of the year.