EUR/USD falls as US dollar rises ahead of US manufacturing PMI

• EUR/USD slips to near 1.1050 as the US dollar performs strongly ahead of the release of ISM US Manufacturing PMI for August.
• The Fed and ECB are expected to cut interest rates this month.
• This week, investors will focus on the US NFP data for August.

EUR/USD is falling back after failing to extend the recovery above the immediate resistance of 1.1080 in the European session on Tuesday. The major currency pair is lower as the US dollar (USD) clings to gains near a near two-week high as the US Dollar Index (DXY), which tracks the greenback against six major currencies, is trading near 101.80 .

The US dollar is showing strength as investors focus on the United States (US) Nonfarm Payrolls (NFP) data for August due out on Friday. Investors will be paying close attention to labor market data for clues about the likelihood of an interest rate cut by the Federal Reserve (Fed) in its September monetary policy meeting. Market participants remain confident that the US central bank will move to policy normalization this month.

According to the CME FedWatch tool, the probability of a 50 basis point (bps) rate cut in September is 31%, while the rest favor a 25 basis point cut to 5.00%-5.25% . The likelihood of a big rate cut fell from 36% a week earlier, particularly after the revised Q2 gross domestic product (GDP) estimate showed the US economy grew at a faster 3% rate than preliminary assumption of 2.8%.

In Tuesday’s session, investors will focus on S&P Global and US ISM Manufacturing Purchasing Managers’ Index (PMI) data for August, which will be released at 13:45 and 14:00 GMT respectively. The S&P Global PMI, which is a final estimate, is expected at 48.0, similar to the flash estimate.

Meanwhile, the ISM report is expected to show that activities in the manufacturing sector contracted at a slower pace, with the PMI coming in at 47.5 from the previous release of 46.8.

Daily Market Reasons: EUR/USD falls as ECB looks to cut interest rates again

• EUR/USD dips to near 1.1050 in European trading hours. The major currency pair is under severe pressure as the euro is on the back foot amid strong speculation that the European Central Bank (ECB) will cut interest rates this month. It would be the ECB’s second rate cut as it moved toward policy normalization in June, with policymakers remaining confident that price pressures will return to the bank’s 2 percent target in 2025.
• Market speculation for an ECB interest rate cut in September strengthened as eurozone price pressures eased significantly and signs of a potential recession in Germany swelled. Headline eurozone inflation fell to 2.2% in August as energy prices fell sharply.
• The German economy contracted in the second quarter and is expected to go through a difficult phase due to weak demand from domestic and overseas markets.
• Meanwhile, ECB policymakers are also comfortable with market expectations of rate cuts in September. Bank of France Governor Francois Villeroy de Galhau told French magazine Le Point on Friday that “it would be fair and wise to decide in favor of another rate cut.” Villeroy added: “Unfortunately, our growth remains too weak” and that “the balance of risks still needs to be monitored in Europe,” reports Reuters.

Technical analysis: EUR/USD is looking for support near the 20-day EMA

EUR/USD is trading in Monday’s trading range after holding below the crucial 1.1100 resistance. The short-term outlook for the major currency pair is still firm as all short-term and long-term exponential moving averages (EMAs) are trending higher.

Earlier, the main currency pair strengthened after breaking the Rising Channel formation on a daily time frame.

The 14-day Relative Strength Index (RSI) dipped below 60.00 after turning overbought near 75.00.

On the other hand, a recent high of 1.1200 and the July 2023 high at 1.1275 will be the next stop for Euro bulls. Meanwhile, the downside is expected to remain cushioned near the psychological support of 1.1000.