The positive outlook remains unchallenged

• EUR/USD again reviewed the YTD highs area around 1.1200.
• The dollar rebounded weakly after Powell’s sudden retreat.
• Germany’s business climate eased slightly to 86.6 in August.

EUR/USD snapped its multi-week bullish momentum and faced downward pressure after hitting new highs just above 1.1200 earlier in the week. This small corrective move came amid a warm resurgence in buying interest for the US dollar (USD).

That said, the Greenback has rebounded from recent 2024 lows near 100.50 (August 26) as reflected by the US Dollar Index (DXY). That rally was driven by a decline in risk appetite following Friday’s strong advance in response to Chairman Jerome Powell’s dovish message at the Jackson Hole Symposium

It’s worth recalling that Powell suggested it was “time” to change the stance of monetary policy, opening the door to an interest rate cut at the September 18 meeting. Powell argued that the labor market appears unlikely to add to inflationary pressures in the near term, adding that the Fed does not seek or welcome any further cooling in labor market conditions.

Still on the labor market, Richmond Federal Reserve President Thomas Barkin indicated earlier Monday that the “low-hiring, low-firing” strategy currently adopted by American businesses in their hiring decisions is unlikely to last, underscoring the risk that companies resort to layoffs if the economy weakens. He noted that worries about the labor market have escalated at the Fed in recent weeks, a key reason why Powell noted in a speech on Friday that interest rate cuts are necessary to prevent further, unwanted increases in unemployment.

In line with these potential rate cuts, CME Group’s FedWatch tool indicates a near 70% chance of a 25bps cut at the September 18 meeting.

Adding to the dollar’s daily recovery, US yields gained some traction across maturities.

Turning the spotlight on the European Central Bank (ECB), its accounts published last week revealed that while policymakers saw no immediate need to cut interest rates last month, they warned the issue could be revisited in September, having given the continued impact of high rates. on economic growth.

Still around the bank, Governing Council member Robert Holzmann suggested an interest rate cut in September was not certain. He noted that if the Fed decides to cut interest rates, it could facilitate further rate cuts by the ECB. He also pointed out that inflation remains stubborn in some areas and warned that the services sector could prevent the inflation target from being reached. Meanwhile, the ECB’s chief economist, Philip Lane, struck a more cautious tone compared to the Fed, noting that the central bank is making “good progress” in reducing inflation to its 2% target, but may still require tighter monetary policy.

In addition to the ECB’s attention, a new survey published last Thursday showed a sharp slowdown in negotiated wage growth in the second quarter, a critical component in anticipating future inflationary pressures.

If the Fed opts for a further or larger rate cut, the policy gap between the Fed and the ECB may narrow over the medium to long term, potentially sending EUR/USD higher, especially as markets expect the ECB to cut rates by two times more this year. .

However, in the longer term, the US economy is expected to outperform Europe, suggesting that any extended dollar weakness may be temporary.

On another front, the single currency’s further gains appeared supported by positioning. Indeed, net long euro positions rose to levels not seen since early June, according to the CFTC’s latest report, signaling continued bullish sentiment among speculators. Meanwhile, commercial traders (hedge funds) maintained their net short positions, with contracts hitting multi-week highs. EUR/USD started a strong recovery in the period under review, decisively breaking the psychological barrier of 1.1000 and setting new annual highs, driven by renewed and significant decline in the greenback.

Looking ahead, Germany will take center stage on this week’s calendar with the final Q2 GDP growth rate, retail sales, preliminary inflation rate and labor market report. In the wider euro area, the advanced rate of inflation will also attract attention.

EUR/USD daily chart

EUR/USD short-term technical outlook

Further north, EUR/USD is expected to challenge its 2024 high of 1.1201 (26 August) ahead of the 2023 peak of 1.1275 (18 July).

The pair’s next downside target is the weekly low of 1.0881 (August 8), which comes ahead of the key 200-day SMA at 1.0848 and the weekly low of 1.0777 (August 1). From here, the low of 1.0666 (June 26) comes before the May low of 1.0649 (May 1).

Looking at the bigger picture, the pair’s uptrend should continue as long as it remains above the key 200-day SMA.

So far, the four-hour chart shows a slight slowdown in the uptrend. The initial resistance level, 1.1201, precedes 1.1275. However, there is quick support at 1.1098, backed by the 55-SMA of 1.1078 and then 1.0949. The Relative Resistance Index (RSI) has dropped to around 62.