Further selling threatens the 1.1000 level

• EUR/USD retreated to fresh two-week lows near 1.1030.
• The dollar resumed its uptrend despite lower yields along the curve.
• US ISM manufacturing PMI rose to 47.2 in August.

After a promising start to the new trading week, EUR/USD came under renewed downward pressure and slipped back into the 1.1030 region on Tuesday, hitting two-week lows as the US dollar (USD) regained its upward momentum. . .

Meanwhile, the spot appears to have found initial support near the 1.1030 area, which is close to the 61.8% Fibonacci retracement of the August rally.

In terms of the greenback, the US dollar index (DXY) rose and neared the 102.00 barrier, or two-week highs, supported by investor sentiment, selling pressure in the risk-on complex and caution ahead of the release of key data from USA, which will take place later in the year. week.

On the monetary policy side, investors are closely watching for clues about the expected size of the Fed’s interest rate cut in September, particularly after Fed Chairman Jerome Powell hinted in his speech at the Jackson Hole Symposium at the end of in August that it might be time to recalibrate. monetary policy. Powell also indicated that, barring any unexpected developments, the labor market is unlikely to add significantly to inflationary pressures in the near term and stressed that the Fed does not want to see further cooling in labor market conditions.

Related to the above, the upcoming US Non-Farm Payrolls (NFP) report will be particularly significant as the Fed shifts from a focus on fighting inflation to preventing job losses as employment data of labor could determine the extent of the Fed’s anticipated rate cut.

According to the CME Group’s FedWatch tool, the probability of a 25 bps rate cut in September is about 63%.

As for the European Central Bank (ECB), its latest minutes revealed that policymakers saw no serious reason to cut interest rates last month, but also warned that the issue could be revisited in September, considering the continuous impact of high rates on economic growth.

However, recent reports suggest that ECB policymakers are increasingly divided over the outlook for growth, a disagreement that could influence interest rate cut talks in the coming months. Some are worried about a potential recession, while others remain focused on lingering inflationary pressures. The central debate revolves around how slowing economic growth and a possible recession could affect inflation – the ECB’s main concern – as it aims to reduce inflation to 2% by the end of 2025.

However, the release of lower-than-expected flash CPI data for August in Germany and the euro area in general could challenge the cautious approach of rate-setters, potentially opening the door for the central bank to consider another rate cut to its meeting on September 12.

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 focus on bringing inflation back to target in due course. While acknowledging that growth risks have increased, she argued that a soft landing is still more likely than a recession.

In short, if the Fed opts for further or more substantial interest rate cuts, the spread between the Fed and the ECB could narrow over the medium to long term, potentially benefiting EUR/USD. This is especially possible as markets anticipate two more interest rate cuts from the ECB this year.

However, over the longer term, the US economy is expected to outperform Europe’s, suggesting that any sustained 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 (such as hedge funds) raised their net short positions to their highest on several months, as a result of a significant increase in open interest.

EUR/USD daily chart

EUR/USD short-term technical outlook

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

The pair’s next downside target is the preliminary 55-day SMA at 1.0903, which comes ahead of the weekly low of 1.0881 (August 8) and the key 200-day SMA at 1.0853. From here comes the weekly low of 1.0777 (August 1), followed by 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 holds above the key 200-day SMA.

The four-hour chart reveals a return to negative sentiment. Initial resistance is at the 55-SMA at 1.1114 before 1.1201. Instead, 1.1033 provides quick support, closely followed by 1.1030 and 200-SMA at 1.0973. The Relative Resistance Index (RSI) has dropped to around 30.