Decent support comes at 1.1030

• EUR/USD added to Friday’s pullback and revised the 1.1030 area.
• The greenback maintained its bullish momentum ahead of US CPI data.
• Investors expect the ECB to cut its policy rate by 25 bps on Thursday.

EUR/USD gained further downside momentum on Monday, extending Friday’s losses and retesting the 1.1030 region, driven by sustained buying pressure on the US dollar (USD).

Meanwhile, the US Dollar Index (DXY) continued to rise, building on its strong post-NFP rally and testing the 101.70 level as investors adjusted to mixed US labor market data, tempering expectations of a 50 bps rate cut by the Fed later this year. month.

Investors are closely monitoring signals about the extent of the Fed’s expected rate cut this month, especially after Fed Chairman Jerome Powell indicated at the Jackson Hole Symposium that it may be time to adjust monetary policy. He noted that, barring any unexpected events, the labor market is unlikely to contribute significantly to inflationary pressures anytime soon and emphasized the Fed’s reluctance to see further cooling in labor market conditions.

Recent comments from Fed officials (San Francisco Fed President Mary Daly, New York Fed President John Williams, Chicago Fed President Austan Goolsbee) were also tipped to start the easing cycle at the September 18 meeting .

In this context, the upcoming US Consumer Price Index (CPI) report is set to be a critical factor, especially given the Fed’s shift from a sole focus on controlling inflation to preventing job losses.

According to CME Group’s FedWatch tool, there is now about a 73% probability of a 25bps rate cut in September, up from nearly 70% last week.

Meanwhile, the latest minutes from the European Central Bank (ECB) showed that policymakers did not see a compelling reason to cut interest rates last month. However, they indicated that this decision could be reviewed in September due to the impact of high rates on economic growth.

Recent reports suggest widening divisions among ECB policymakers over the outlook for growth, which could affect future talks on interest rate cuts. Some officials are worried about a possible recession, while others are focused on persistent inflationary pressures.

However, weaker-than-expected CPI data for August in Germany and the euro zone could prompt a cautious stance among some officials, potentially opening the door for the ECB to consider another rate cut at its Sept. 12 meeting.

Overall, if the Fed moves forward with further or larger interest rate cuts, the policy gap between the Fed and the ECB could narrow over the medium to long term, potentially benefiting EUR/USD. This is especially likely as markets expect two more rate cuts from the ECB this year.

However, over the longer term, the US economy is expected to outperform the European economy, which could limit any sustained dollar weakness.

Finally, speculators (non-commercial traders) increased their net long positions in the euro (EUR) to levels not seen since January, while commercial traders (such as hedge funds) raised their net short positions to highs of several months, all against the backdrop of a marked increase in open interest, according to the CFTC’s report for the week ended Sept. 3.

EUR/USD daily chart

EUR/USD short-term technical outlook

Further north, EUR/USD is expected to challenge the 2024 peak of 1.1201 (August 26), followed by the 2023 peak of 1.1275 (July 18) and the round level of 1.1300.

The pair’s next downside target is the September low of 1.1026 (September 3), which is ahead of the preliminary 55-day SMA at 1.0930 and the weekly low of 1.0881 (August 8). From here, the critical 200-day SMA is at 1.0857, ahead of the weekly low of 1.0777 (August 1) and the June low of 1.0666.

Meanwhile, the uptrend of the pair is expected to continue as long as it is above the important 200-day SMA.

The four-hour chart shows a modest return to negative sentiment. That said, the initial resistance level is 1.1155, followed by 1.1190 and 1.1201. Instead, there is immediate support at 1.1026, before the 200-SMA of 1.0997, and then 1.0949. The Relative Resistance Index (RSI) rose to around 40.