Further gains likely above 1.0850

• EUR/USD regained slight upward traction and revisited the 1.1180 region.
• The dollar ended its auspicious start to the week and retreated modestly.
• Germany’s final GDP figures were slightly above expectations in Q2.

EUR/USD traded in a fairly narrow range on Tuesday, leaving behind Monday’s decline and instead reorienting once again to the upside, where it awaits recent YTD highs around 1.1200. This minor development came on the back of a slight revival in selling interest in the US dollar (USD).

In fact, the greenback resumed its downtrend after returning to recent 2024 lows near 100.50 on Monday, as indicated by the US Dollar Index (DXY). This decline was fueled by a better tone of the risk complex, all against the backdrop of a mixed performance of US yields and a marked increase in German 10-year bund yields.

Meanwhile, investors remained focused on the prospect of an interest rate cut by the Federal Reserve (Fed) in September, all after Chairman Jerome Powell suggested it may be time to adjust monetary policy, hinting at a potential rate cut to September 18 meeting. He also argued that the labor market is unlikely to add to inflationary pressures any time soon and stressed that the Fed does not want further cooling in labor market conditions.

Also around the Fed, Federal Reserve Bank of San Francisco President Mary Daly said Monday that “the time has come” to cut rates, echoing sentiments expressed by Powell last week. However, she noted that the size of the first rate cut would depend on data. Daly also noted that it is hard to imagine anything that could prevent a rate cut in September from the current range of 5.25%-5.50%.

In line with these potential rate cuts, CME Group’s FedWatch tool shows a nearly 65% ​​probability of a 25bps cut in September.

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

In that regard, board member Klass Knot suggested on Tuesday that the central bank could gradually cut interest rates if inflation continues to fall, although he noted that more data is needed before deciding on a possible cut in September. He emphasized a cautious approach, indicating that while there may be a case for easing policy, a final decision has yet to be made.

In conclusion, if the Fed opts for further or higher interest rate cuts, the policy gap between the Fed and the ECB may narrow over the medium to long term, potentially pushing EUR/USD higher, especially as markets expect the ECB to taper rates twice as much. this year.

However, in the longer term, the US economy is expected to outperform Europe, suggesting that any prolonged dollar weakness can be contained.

On the other hand, the single currency’s additional 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, indicating 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 be at the center of attention on this week’s calendar with the release of retail sales, the advanced rate of inflation and the labor market report. In the wider euro area, the skyrocketing inflation rate will also attract attention.

Earlier on Tuesday, Germany’s final second-quarter GDP growth rate was flat from the previous quarter and contracted 0.1% from the previous quarter. In addition, consumer confidence worsened to -22.0 for September, according to GfK.

EUR/USD daily chart

EUR/USD short-term technical outlook

Further north, EUR/USD is likely to test the 2024 high of 1.1201 (August 26), which is ahead of the 2023 high of 1.1275 (July 18) and the 1.1300 round level.

The next downside target for the pair is the weekly low of 1.0881 (August 8), which is ahead of the critical 200-day SMA at 1.0850 and the weekly low of 1.0777 (August 1). From here, the low of 1.0666 (June 26) precedes the low of 1.0649 (May 1).

Looking at the big picture, the pair’s uptrend should continue as long as it holds above the crucial 200-day SMA.

So far, the four-hour chart indicates a marginal theme at the upper end of the current range. Initial resistance is 1.1201, ahead of 1.1275. Instead, there is immediate support at 1.1098, reinforced by the 55-SMA at 1.1095 and then 1.0949. The Relative Resistance Index (RSI) looked stable around 59.