Pre-Fed caution could trigger some consolidation

• EUR/USD came under pressure and revised the 1.1110 region.
• The US dollar traded on a better tone following the release of positive data.
• Economic sentiment in Germany and EMU disappointed markets.

EUR/USD gave up some of the strong upward momentum seen earlier in the week, driven by renewed buying pressure on the US dollar (USD) on Tuesday.

That said, the US Dollar Index (DXY) experienced some respite after three consecutive daily declines, approaching the key barrier level of 101.00, despite growing speculation for a 50bp rate cut by The Federal Reserve (Fed) at its next meeting on September 18.

According to CME Group’s FedWatch tool, the probability of a 50 basis point rate cut is now more than 60%, up from nearly 30% just a week ago.

The greenback’s daily recovery was also supported by a decent rebound in US yields across time frames, while 10-year asset yields also posted decent gains after two straight days of losses.

Meanwhile, European Central Bank (ECB) policymakers remained cautious about signaling a further interest rate cut in October.

Still around the ECB, Council member Gediminas Simkus on Friday voiced support for two more interest rate cuts this year, along with “significantly” more in the future as inflation returns to the bank’s 2% target.

It is important to note that the ECB’s decision to ease monetary policy last week was based on its assessment of inflation and economic dynamics. Although the bank did not signal an interest rate cut in October, it acknowledged that domestic inflation remains high. In her press conference, ECB President Christine Lagarde indicated that the easing impact of monetary policy restrictions should benefit the economy, projecting inflation to fall to 2% by 2025, while maintaining a cautious stance on stocks future

Looking ahead, if the Federal Reserve implements further or larger interest rate cuts, the policy gap between the Fed and the ECB may narrow, potentially supporting EUR/USD. This is especially likely as markets anticipate two more rate cuts from the ECB and around 100-125 basis points of easing from the Fed by the end of the year.

However, the US economy is expected to outperform its European peer over the longer term, which could limit significant or sustained weakness in the US dollar.

Finally, the latest CFTC report for the week ended September 10 revealed that speculators cut their net long positions in the euro to three-week lows of around 81,400 contracts, while commercial traders, including hedge funds , also reduced their net short positions to many. -downs of the week amid a slight increase in open interest.

EUR/USD daily chart

EUR/USD short-term technical outlook

Further EUR/USD gains should meet early resistance at the September high of 1.1155 (6 September) before reaching the 2024 high of 1.1201 (26 August) and the 2023 high of 1.1275 (18 July).

Instead, the pair’s next downside target appears at the September low of 1.1001 (September 11), which anticipates the temporary 55-day SMA at 1.0969 and the weekly low of 1.0881 (August 8). The critical 200-day SMA is at 1.0866 and comes ahead of the weekly low of 1.0777 (August 1) and the June low of 1.0666.

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

The four-hour chart shows that the uptrend seems to have hit a decent hurdle before 1.1150 so far. Against this, the initial resistance level remains at 1.1155, followed by 1.1190 and 1.1201. On the other hand, the 55-SMA at 1.1073 provides transitory support, backed by the 200-SMA at 1.1038 and then 1.1001. The Relative Resistance Index (RSI) broke below the 60 mark.