Losses could accelerate to a break of 1.1000

• EUR/USD retreated to three-week lows near the 1.1000 area.
• Further gains lifted the US dollar to multi-week highs.
• US ISM services PMI rose well above consensus in September.

EUR/USD continued its unbroken slide on Thursday, hitting a three-week low just shy of the key 1.1000 region on ongoing risk aversion and further strengthening of the US dollar (USD).

In fact, the greenback advanced further as cautious sentiment prevailed amid growing geopolitical jitters in the Middle East, with concerns about potential retaliation from Israel still looming large.

This persistent risk-off tone has overshadowed investor optimism around China’s recent stimulus measures aimed at boosting its post-pandemic economy.

On the monetary policy front, bets on further easing by the Federal Reserve (Fed) in November and December remained steady, although the likelihood of another substantial rate cut appeared to be fading.

Chairman Jerome Powell recently signaled a preference for a 25 basis point cut at those meetings, despite the market expecting about 75 basis points of easing by the end of the year.

Along the same lines, Richmond Fed President Thomas Barkin noted that the Fed’s efforts to return inflation to its 2 percent target could take longer than expected, potentially limiting how much interest rates can be cut.

Across the Atlantic, the European Central Bank (ECB) took a more accommodative stance at its September meeting due to inflation and economic pressures. ECB President Christine Lagarde stressed that domestic inflation remains high, but noted that restrictive policies are starting to ease, which could support the economy. The ECB expects inflation to reach its 2% target by 2025.

The latest comments from Vice President Luis de Guindos suggested that euro zone growth could be weaker than expected in the near term, but he expressed optimism about a recovery led by rising real incomes and the easing of restrictive policies.

In addition, ECB board member Frank Elderson echoed expectations that inflation will hit the 2% target next year, but warned against complacency given the structural changes facing the eurozone. Similarly, the ECB’s Isabel Schnabel suggested that inflation in the region may return to the 2% target, fueling expectations of future rate cuts.

Recent data showed that eurozone inflation, as measured by the Harmonized Index of Consumer Prices (HICP), rose 1.8% in the year to September, while the core HICP rose 2.7, all pointing to further rate cuts as soon as this month.

Looking ahead, further Fed rate cuts could narrow the gap between the Fed and the ECB, potentially supporting EUR/USD. Markets expect two more rate cuts from the ECB and about 50 basis points of Fed easing for the rest of the year. However, the relatively better performance of the US economy may prevent significant dollar weakness.

Speculative positions show that non-commercial net long positions in the euro hit a two-week high, while commercial players’ net short positions remain largely unchanged. Despite continued volatility, EUR/USD was broadly uptrending, hovering around the upper 1.1100 range.

EUR/USD daily chart

EUR/USD short-term technical outlook

Further declines could motivate EUR/USD to test the 1.1000 support sooner rather than later. Once that region is cleared, the spot could return to weekly lows of 1.0949 (August 15) and 1.0881 (August 8).

On the other hand, initial resistance is at the 2024 high of 1.1214 (September 25), followed by the 2023 peak of 1.1275 (July 18) and the round level of 1.1300.

Meanwhile, the pair’s uptrend is expected to continue as long as it holds above the critical 200-day SMA of 1.0874.

The four-hour chart shows a deepening of the negative trend. The initial resistance level is at the 200-SMA at 1.1106 before 1.1143 and then 1.1214. On the downside, the first support is 1.1007, closely followed by 1.1001 and then 1.0949. The Relative Resistance Index (RSI) has dropped to around 34.