Further upside targets the 2024 high around 1.1200

• EUR/USD rose further and hit three-week highs near 1.1190.
• The US dollar accelerated its decline following the Fed’s rate decision.
• The Federal Reserve cut interest rates as expected.

EUR/USD managed to regain fresh upward momentum and extended its bullish momentum near the 1.1190 region, or three-week highs, on Wednesday.

The additional spot advance came in response to increased weakness in the US dollar (USD), particularly after the Federal Reserve’s (Fed) decision to cut interest rates by 50 bps.

On the latter, the US dollar index (DXY) fell to new lows near 100.20 after the Fed opted for the jumbo option and cut interest rates by 50 basis points. In addition, Fed officials now have an average projection of the Fed Funds rate at 4.4% through the end of 2024, down from the previous estimate of 5.1%. For the end of 2025, their median view is 3.4%, up from 4.1% previously, and for the end of 2026, the rate is projected at 2.9%, slightly lower than the previous forecast of 3.1%. The FOMC expressed increased confidence that inflation is moving sustainably toward the 2% target, while assessing that risks to both employment and inflation targets are more balanced.

In addition, policymakers now expect PCE inflation to be 2.3% by the end of 2024, compared to 2.6% in June projections, with core inflation projected at 2.6%, down from to 2.8%. They also forecast an unemployment rate of 4.4 percent in late 2024 and 2025, up from the current rate of 4.2 percent. In addition, GDP growth for 2024 is expected to be 2%, slightly below the June forecast of 2.1%.

At his press conference, Chairman Jerome Powell said the bank’s decision reflected increased confidence in the continued strength of the labor market. He noted that upside risks to inflation have eased, while downside risks to the labor market have increased. Powell also noted that if the economy remains strong and inflation persists, the Fed may opt to cut interest rates at a slower pace. He pointed out that the approach to rate cuts could be adjusted, either moving faster, slower or pausing, depending on what is deemed appropriate. He cautioned that the current decision should not be interpreted as setting a new standard pace for policy adjustments.

The greenback’s daily decline was also accompanied by a mixed tone in US yields across maturities, while German 10-year bund yields contributed to Tuesday’s rebound and flirted with 2.20%.

Meanwhile, European Central Bank (ECB) policymakers are maintaining a cautious bias on a further interest rate cut in October. That said, Bundesbank President Joachim Nagel indicated on Wednesday that inflation in the euro zone has not yet been reduced to a level acceptable to the central bank, and interest rates must therefore remain high enough to manage price pressures. While Nagel did not rule out a possible move in December, unlike several of his colleagues, he noted that considerable obstacles remained.

It is important to note that the ECB’s decision to ease monetary policy last week was influenced by its assessment of inflation and economic conditions. Although the ECB did not explicitly signal an interest rate cut for October, it acknowledged that domestic inflation remains high. ECB President Christine Lagarde noted during the press conference that the easing impact of monetary policy restrictions should help the economy, with inflation expected to return to 2% by 2025, although she maintained a cautious stance on further action .

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

However, the US economy is expected to outperform its European counterpart over the long term, which could limit any significant or prolonged weakness in the US dollar.

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

EUR/USD daily chart

EUR/USD short-term technical outlook

Further EUR/USD advances are likely to face early resistance around the September high of 1.1189 (18 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 is the September low of 1.1001 (September 11), ahead of the temporary 55-day SMA at 1.0975 and the weekly low of 1.0881 (August 8). The critical 200-day SMA follows at 1.0867, ahead of the weekly low of 1.0777 (August 1) and the June low of 1.0666.

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 potential for some consolidation in the near-term horizon. That said, the initial resistance level is at 1.1189, followed by 1.1201 and 1.1275. On the other hand, the 55-SMA at 1.1078 provides temporary support, followed by the 200-SMA at 1.1049 and finally 1.1001. The Relative Resistance Index (RSI) rose 64.