It needs to find support above 1.1165-70 for the bulls to regain control

• EUR/USD draws some bearish buyers following Monday’s dismal decline inspired by Eurozone PMIs.
• Dovish Fed expectations are driving fresh USD selling and providing some support to the currency pair.
• The upside appears limited as traders are likely to wait for more clues on the Fed’s rate cut path.

The EUR/USD pair is higher on Tuesday and for now appears to have locked in the previous day’s decline, which followed disappointing data that showed business activity in the Eurozone contracted more than expected in September. In fact, S&P Global’s Flash Composite Eurozone PMI contracted for the first time in seven months and fell to 48.9 in September from the previous month’s final print of 51.0. The survey showed that Germany and France – the two largest economies of the monetary union – were largely responsible for the decline. That in turn raised bets for a cut of at least 25 basis points (bps) at the European Central Bank’s (ECB) October meeting and heavily weighed on the single currency, which posted its biggest daily decline against the US dollar (USD). in three months.

In contrast, the US composite PMI showed that business activity was steady in September and came in at 54.4, down slightly from 54.6 in August. Further details of the report showed that the average prices charged for goods and services rose at the fastest pace in six months, pointing to a possible acceleration of inflation in the coming months. This, in turn, provided a modest boost to the Green Bill and helped lower the EUR/USD pair. That said, expectations for more aggressive policy easing by the Federal Reserve (Fed) keep a lid on any significant USD appreciation movement and help EUR/USD regain positive traction. According to CME Group’s FedWatch tool, market participants are now pricing in another outsized rate cut at the November FOMC meeting.

In addition, the Fed is expected to cut borrowing costs by 125 bps in 2024, and speculation was further fueled by overnight comments from a number of influential FOMC members. Minneapolis Fed President Neel Kashkari noted that the balance of risks has shifted away from higher inflation and toward the risk of further labor market weakness, justifying a lower federal funds rate. In addition, Atlanta Fed President Raphael Bostic said recent data show convincingly that the US is on a sustainable path to price stability and that risks to the labor market have increased. Separately, Chicago Fed President Austan Goolsbee said deterioration in the labor market usually happens quickly and that keeping rates high doesn’t make sense when you want things to stay where they are.

This, along with strong underlying bullish sentiment in global equity markets, is undermining safe-haven money and acting as a tailwind for the EUR/USD pair. Traders, however, appear reluctant and may choose to wait for more clues about the Fed’s rate cut path before positioning for the next step of a directional move. The focus will therefore remain on the release of the US Personal Consumption Expenditure (PCE) price index on Friday. Meanwhile, traders on Tuesday will take cues from a scheduled speech by Fed Governor Michelle Bowman and US macro data – the Conference Board’s Consumer Confidence Index and the Richmond Manufacturing Index. Apart from this, Deutsche Bundesbank President Joachim Nagel’s speech could further help create short-term trading opportunities.

Technical perspectives

Technically, any further upside is likely to face some resistance near the 1.1165-1.1170 supply zone. This is followed by the YTD peak around 1.1200 reached in August which, if decisively broken, will be seen as a new trigger for bullish traders. With the oscillators on the daily chart – although losing their action – still holding a slight positive bias, the EUR/USD pair could then extend the recent upward trajectory seen over the last three months or so.

On the other hand, the round figure of 1.1100 now appears to protect the immediate downside ahead of the overnight swing low around the 1.1085-1.1080 region. Some further selling could expose support at the 50-day simple moving average (SMA), currently pegged near the 1.1020 area. This is closely followed by the psychological mark of 1.1000 which, if decisively breached, will suggest that the EUR/USD pair has broken out and pave the way for deeper losses. Further corrective decline could drag spot prices into the 1.0950-1.0940 region.

EUR/USD daily chart