Initial conflict is near 1.1050

• EUR/USD gave up some of the recent weakness and revised 1.1080.
• The dollar traded in a wobbly mood amid the Labor Day holiday.
• Uncertainty hangs over a potential ECB interest rate cut in September.

After three consecutive days of losses, EUR/USD finally managed to regain its smile and print a decent advance at the start of the week, resuming the 1.1080 area on the back of a warm crisis of selling pressure in the US dollar (USD) .

So far, the spot seems to have encountered a fairly decent retracement around the 1.1050 region, roughly around the 61.8% Fibo retracement of the August rally.

Around the USD, the US Dollar Index (DXY) remained slightly on the defensive amid weak trading conditions, all in response to the US Labor Day holiday and the consistent lack of activity in domestic markets.

The pair’s daily gain was also driven by a broad recovery in German 10-year yields, which rose to multi-week highs around 2.35%.

Investors are closely monitoring any indication of the expected size of the Fed’s rate cut in September after Fed Chairman Jerome Powell suggested it may be time to recalibrate monetary policy in his speech at the Jackson Hole Symposium later this month August. Powell also noted that “barring any unexpected developments, the labor market is unlikely to contribute significantly to upward pressures on inflation in the near term” and emphasized that the Fed does not want to see further cooling in market conditions work.

The US non-farm payrolls (NFP) report due on Friday will be particularly important after Powell’s shift from tackling inflation to a focus on preventing job losses, as employment data has the potential to determine the extent of the expected cut of the interest rate by the Fed.

According to CME Group’s FedWatch tool, the probability of a 25 bps rate cut in September is around 68%.

As for the European Central Bank (ECB), its latest minutes indicated that policymakers did not see a compelling reason to cut interest rates last month, but also warned that the issue could be revisited in September, given the continued impact of high rates on the economy. growth.

However, recent sources noted that policymakers are becoming increasingly divided over the outlook for growth, a disagreement that could influence rate-cutting talks for the coming months. Some are worried about a potential recession, while others remain focused on lingering inflationary pressures. The heart of the discussion is how slowing economic growth and a possible recession could affect inflation – the ECB’s top priority – as it aims to reduce inflation to 2% by the end of 2025.

However, the release of lower-than-expected flash CPI data in Germany and the wider eurozone for August should prompt a cautious approach from rate-setters, paving the way for the central bank to consider another rate cut of the rate at the September 12 meeting.

In this regard, ECB board member Isabel Schnabel, known for her conservative policy stance, argued that inflation concerns should take precedence over growth. In a speech on Friday, she said monetary policy should continue to prioritize returning inflation to target in due course. While she acknowledged that risks to growth had increased, she argued that a soft landing was still more likely than a recession.

In short, if the Fed opts for further or more significant interest rate cuts, the policy gap between the Fed and the ECB could narrow over the medium to long term, potentially boosting EUR/USD. This is especially possible as markets expect the ECB to cut rates two more times this year.

However, over the longer term, the US economy is expected to outperform Europe’s, suggesting that any prolonged dollar weakness may be limited.

Finally, speculators (non-commercial traders) increased their net long positions in the euro (EUR) to levels not seen since January, while commercial players (hedge funds) raised their net short positions to multi-month highs , driven by a significant increase in open interest.

EUR/USD daily chart

EUR/USD short-term technical outlook

Further north, EUR/USD is expected to challenge its 2024 high of 1.1201 (August 26), followed by the 2023 peak of 1.1275 (July 18) and the 1.1300 round level.

The pair’s next downside target is the provisional 55-day SMA at 1.0898, ahead of the weekly low of 1.0881 (August 8) and the crucial 200-day SMA at 1.0853. Loss of the latter exposes the weekly low of 1.0777 (August 1), before the June low of 1.0666 (June 26) and the May low of 1.0649 (May 1).

Meanwhile, the pair’s uptrend is expected to continue as long as it continues above the important 200-day SMA.

The four-hour chart shows a slight resurgence of the bullish outlook. Initial resistance is 1.1201, which comes before 1.1275. Instead, 1.1040 provides immediate support, followed by 1.1030 and the 200-SMA at 1.0969. The Relative Resistance Index (RSI) rose 41.