Additional advances seem likely in the short term

• EUR/USD added to Wednesday’s gains and revised the 1.1180 area.
• The US dollar held its post-FOMC bearish tone well.
• Intense risk-off sentiment supported the advantage in the pair.

EUR/USD kept its upward momentum nice and strong on Thursday, retesting the area of ​​three-week highs around 1.1180.

The pair’s second straight advance was fueled by another bearish performance in the US dollar as market participants continued to process Wednesday’s 50 basis point rate cut by the Federal Reserve (Fed) and the likelihood of further cuts of the rate in the second part of the year.

On the USD front, the US Dollar Index (DXY) was unable to sustain an earlier move through the 101.50 region, eventually succumbing to the wave of selling pressure and ending the session well south of 101.00 amid a declines in US yields on the short end vs. further improvements in belly and long end.

Following the FOMC event, it is uncertain whether the size of the September rate cut will be repeated. Updated “dot plot” indicates 50 more basis points of relaxation this year. In addition, the bank’s statement and Chairman Powell emphasized that the 50 basis point cut was not a panic reaction.

Instead, European Central Bank (ECB) officials are maintaining a cautious stance on a potential rate cut in October. In that regard, Bundesbank President Joachim Nagel argued on Wednesday that inflation in the euro zone remains above acceptable levels, suggesting that interest rates must remain high enough to manage price pressures. While he did not rule out a possible move in December, he acknowledged the significant challenges ahead.

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 has not explicitly indicated an interest rate cut for October, it has acknowledged that domestic inflation remains high. ECB President Christine Lagarde noted that easing the impact of monetary policy restrictions should benefit the economy, with inflation expected to return to 2 percent by 2025, although she maintained a cautious outlook on further action.

Looking ahead, if the Fed continues with further interest rate cuts, the policy gap between the Fed and the ECB may narrow, potentially supporting EUR/USD. This is especially plausible as markets anticipate 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 dollar weakness.

Finally, the latest CFTC report for the week ended September 10 showed that speculators cut 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 gains are expected to meet early resistance near the September peak of 1.1189 (September 18), before reaching the 2024 high of 1.1201 (August 26) and the 2023 peak of 1.1275 ( July 18).

Instead, the pair’s next downside target is the September low of 1.1001 (September 11), which is ahead of the temporary 55-day SMA at 1.0975 and the weekly low of 1.0881 (August 8). The critical 200-day SMA is next at 1.0868, 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 resurgence of the upside bias. 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 1.1080 provides temporary support, followed by the 200-SMA at 1.1055 and finally 1.1001. The Relative Resistance Index (RSI) rose 61.