Strong resistance appeared just above 1.1200

• EUR/USD again failed to extend the rally above 1.1200.
• The US dollar rebounded significantly and tested two-day highs.
• Fed Chairman Powell sees 50 basis points more easing this year.

EUR/USD added to Friday’s retracement, surrendering nearly a cent from daily highs past the 1.1200 barrier and retreating to the 1.1110 region towards the end of the NA session on Monday.

The pair’s sharp decline came in response to an equally strong bounce in the US dollar (USD), which managed to reverse an initial decline to the 100.15 region when gauged by the US dollar index (DXY). Accompanying the move in the green, US production rose across the spectrum, reaching the higher end of the recent range.

Meanwhile, the risk-bound galaxy has failed to gather further steam despite recent announcements of a stimulus package in the Chinese economy, which should help that economy finally pick up a pace.

On the monetary policy front, market participants continued to anticipate further easing from the Federal Reserve (Fed) at its November and December meetings, all in tandem with yet-unknown optimism for a soft landing for the US economy.

Following the FOMC meeting, there will be renewed uncertainty over whether the September rate cut will be repeated. The updated “Dot Plot” indicates an additional 50 points of cuts this year. Fed Chairman Jerome Powell emphasized that the recent rate cut was not a response to panic, clarifying the rationale behind the decision.

On Monday, Federal Reserve Chairman Jerome Powell argued that the US economy appears positioned for a continued slowdown in inflation, which would allow the Fed to cut its benchmark interest rate and eventually reach a neutral level that does not it further constrains economic activity. His observations did not signal a specific tendency to speed up or slow down the pace of speed reductions.

Meanwhile, the European Central Bank (ECB) decided to ease monetary policy at its September meeting, influenced by its assessment of inflation and economic conditions. Although the ECB did not signal an interest rate cut for October, it acknowledged that domestic inflation remains high. ECB President Christine Lagarde pointed out that the lessened impact of tight monetary policy could benefit the economy, with inflation expected to return to 2% by 2025, although she maintained a cautious stance on further action.

Still around the Central Bank, President Christine Lagarde has expressed growing confidence that inflation will return to the bank’s 2% target, a development expected to be reflected in the ECB’s October policy decision.

Looking ahead, if the Fed continues with further rate cuts, the policy gap between the Fed and the ECB may narrow, potentially supporting EUR/USD. That scenario seems likely as markets anticipate two more rate cuts from the ECB and between 100 and 125 basis points of easing from the Fed over the next 12 months.

However, the longer-term outlook suggests that the US economy is expected to outperform the European economy, which may limit any substantial or prolonged weakness in the dollar.

On another front, non-commercial net long positions in the euro rose to their highest level in two weeks, with commercial players keeping net short positions almost unchanged and a slight increase in open interest. EUR/USD moved in a volatile manner, although it showed a modest uptrend in the upper 1.1100 range during the period under review.

EUR/USD daily chart

EUR/USD short-term technical outlook

EUR/USD gains are expected to meet initial resistance at the 2024 top of 1.1214 (September 25), followed by the 2023 top of 1.1275 (July 18).

The pair’s next downside target is the provisional 55-day SMA at 1.1019, ahead of the September low of 1.1001 (September 11), and the weekly low of 1.0881 (August 8).

Meanwhile, the pair’s uptrend is projected to continue as long as it remains above the key 200-day SMA at 1.0874.

The four-hour chart indicates a resurgence of the downtrend. The initial resistance level remains at 1.1214, then 1.1275. On the other hand, the initial claim is at 1.1113, followed by the 200-SMA at 1.1101 and then 1.1082. The Relative Strength Index (RSI) has dropped to around 45.