Price Action is now analyzing US CPI data

• EUR/USD extended its weekly leg lower and is approaching the 1.1000 support.
• The US dollar traded with minimal gains ahead of US inflation data.
• Investors are looking at US CPI and its impact on the size of September’s rate cut.

EUR/USD experienced renewed downward momentum on Tuesday, extending its losses from earlier in the week and heading back towards the 1.1015-10101 zone, driven by continued buying pressure on the US dollar (USD).

Meanwhile, the US Dollar Index (DXY) remained at the upper end of its recent range near the 101.70 level as US yields deepened their curve pullbacks.

Meanwhile, market participants are expected to closely watch the release of US CPI inflation figures on Wednesday, as they could provide further signals about the extent of interest rate cuts expected by the Fed this month, especially after Fed Chair , Jerome Powell, suggested at the Jackson Hole Symposium that it might be time to adjust monetary policy.

Also backing a rate cut later in the month were several Fed officials, namely San Francisco Fed President Mary Daly, New York Fed President John Williams and Chicago Fed President Austan Goolsbee.

In this context, the upcoming US Consumer Price Index (CPI) report is set to be a key factor, especially given the Fed’s shift from solely focusing on managing inflation to avoiding job losses.

According to the CME Group’s FedWatch tool, there is currently about a 63% probability of a 25bps rate cut in September.

A move to the European Central Bank (ECB) noted that recent Accounts showed that policy makers did not see a strong reason to cut interest rates last month. However, they noted that this decision could be reviewed in September due to the impact of high rates on economic growth.

Recent reports indicate growing divergence among ECB policymakers over the outlook for growth, which could affect future discussions on interest rate cuts. Some officials are worried about a potential recession, while others remain focused on lingering inflationary pressures.

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

Overall, if the Fed proceeds 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 supporting EUR/USD. This is especially likely as markets anticipate two more interest rate cuts from the ECB this year.

In the long term, however, the US economy is expected to outperform the European economy, which could limit any prolonged dollar weakness.

Finally, according to the CFTC report for the week ended September 3, speculators (non-commercial traders) increased their net long positions in the euro (EUR) to their highest levels since January, while commercial traders (such as funds speculative) raised their net short positions to multi-month highs amid a notable increase in open interest.

EUR/USD daily chart

EUR/USD short-term technical outlook

If the bulls regain their advantage, EUR/USD should face the initial hurdle at the September high of 1.1155 (September 6), before the 2024 peak of 1.1201 (August 26) and the 2023 peak of 1 ,1275 (July 18).

On the other hand, the pair’s next downside target is the September low of 1.1015 (September 10), ahead of the preliminary 55-day SMA at 1.10936 and the weekly low of 1.0881 (August 8). The crucial 200-day SMA is at 1.0858, ahead of the weekly low of 1.0777 (August 1) before the June low of 1.0666.

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

The four-hour chart suggests a minor return to negative sentiment. However, the initial resistance level is 1.1155, followed by 1.1190 and 1.1201. Instead, there is immediate support at 1.1015, before the 200-SMA of 1.1002, and then at 1.0949. The Relative Resistance Index (RSI) has fallen below 34.