Next up appears 1.1000

• EUR/USD’s bullish attempt broke just short of the key 1.1000 barrier.
• The US dollar alternated gains with losses at the upper end of the range.
• Industrial production in Germany expanded more than estimates in August.

EUR/USD ended Tuesday’s session around the 1.0970 region, barely changing from Monday’s close. Earlier in the day, the spot tried to retest the 1.1000 hurdle, although the move was unsuccessful.

Meanwhile, the US dollar (US) held marginally flat amid mixed US yields across the curve, while investors remained cautious following news of potential ceasefire talks between Israel and Hezbollah.

Globally, recent risk-off sentiment has outweighed any optimism about China’s stimulus efforts to boost the post-pandemic economy.

On the monetary policy front, market expectations remained for further easing by the Federal Reserve (Fed) in the coming months. However, the likelihood of a big rate cut has receded, especially after September’s stronger-than-expected US jobs report.

Fed Chairman Jerome Powell reiterated a data-driven approach to future rate decisions, signaling that the pace of rate cuts could slow. Markets are currently pricing in a possible 25 basis point rate cut at the Fed’s November and December meetings.

Still around the Fed, officials on Tuesday signaled their support for further rate cuts. President St. Louis Governor Alberto Musalem approved further cuts as the economy progresses, while New York Governor John Williams indicated more cuts could be justified “over time” after September’s half-point cut . Finally, FOMC Governor Adriana Kugler also expressed strong support for recent tapering and would support further easing if inflation continues to fall as anticipated.

Across the Atlantic, the European Central Bank (ECB) took a more cautious stance at its recent meeting due to inflationary and economic pressures. In her latest remarks, ECB President Christine Lagarde noted that while inflation remains high in the eurozone, tight monetary policies are beginning to ease, which could support growth. The ECB expects inflation to reach its 2% target by 2025.

Earlier in the week, ECB Vice President Luis de Guindos recently indicated that eurozone growth may be weaker in the short term, but remained optimistic about a recovery driven by rising real incomes and easing monetary policies. In addition, the head of the French Central Bank, François Villeroy de Galhau, suggested that weak economic growth could lead to inflation exceeding the bank’s 2% target, which could prompt rate adjustments. He predicted further changes to the deposit rate and anticipated a return to a “neutral” rate by 2025.

Recent data showed that eurozone inflation, as measured by the Harmonized Index of Consumer Prices (HICP), fell below the ECB’s target in September, reaching 1.8% annually. This only reinforces the view that the ECB may consider further rate cuts in the next few months.

With further interest rate cuts anticipated from both the Fed and the ECB, the outlook for EUR/USD appears to be increasingly focused on macroeconomic conditions. In this regard, the US economy is expected to outperform its European counterpart, which could translate into additional strength for the US dollar.

When it comes to positioning, non-commercial traders (speculators) reduced their net long positions in the euro to the lowest level since late August, while commercial players reduced their net short positions to a six-week low on the background of a modest drop in open interest. according to the CFTC Positioning Report for the week ending October 1.

EUR/USD daily chart

EUR/USD short-term technical outlook

Further declines could see EUR/USD test the October low of 1.0950 (October 4) ahead of the weekly low of 1.0881 (August 8).

On the other hand, there is a tentative hurdle at the 55-day SMA at 1.1032, ahead of the 2024 peak of 1.1214 (September 25), followed by the 2023 peak of 1.1275 (July 18) and the level of the round of 1.1300.

Meanwhile, the pair’s uptrend is expected to continue as long as it holds above the critical 200-day SMA of 1.0873.

The four-hour chart shows a bullish development for now. The initial resistance level is 1.1082, ahead of the 200-SMA of 1.1094 and 1.1143. On the other hand, the initial dispute lines up at 1.0950, followed by 1.0913 and then 1.0881. The Relative Resistance Index (RSI) has dropped to around 35.