Decent retracement is seen around 1.0950

• EUR/USD has finally had a respite from strong selling pressure.
• The US dollar remained largely edged near recent highs on Monday.
• German factory orders contracted more than expected in August.

EUR/USD reversed its multi-day slide on Monday, managing to bounce back to recent multi-week lows near 1.0950 on an inconclusive start to the week around the US dollar (USD).

Meanwhile, the Greenback failed to extend its ongoing rally further north of the 102.70 region, despite US yields adding to the ongoing strong rally and geopolitical concerns in the Middle East continuing to rise.

Meanwhile, it’s worth noting that the recent risk-off environment has overshadowed investor optimism about China’s recent stimulus measures aimed at boosting the post-pandemic economy.

On the monetary policy side, expectations for more easing by the Federal Reserve (Fed) in the coming months remained in place, although the likelihood of another jumbo interest rate cut continued to decline, particularly in response to the seats report stronger-than-expected US job growth since September.

Recently, Fed Chairman Jerome Powell emphasized a data-driven approach, suggesting that the pace of future rate cuts could slow. However, markets are pricing in the possibility that the Fed will cut interest rates by 25 bps at its November and December meetings.

Still around the Fed, Minneapolis Fed President Neel Kashkari highlighted the resilience of the US economy at an event on Monday as he ruled out signs of a resurgence of inflation.

Across the Atlantic, the European Central Bank (ECB) took a more cautious stance at its recent meeting amid inflation and economic pressures. ECB President Christine Lagarde pointed out that while domestic inflation remains high, tight monetary policies are beginning to ease, which could support economic growth. The ECB expects inflation to reach its 2% target by 2025.

Comments last week from ECB Vice President Luis de Guindos suggested that eurozone growth could be weaker than previously forecast in the near term. However, he expressed optimism about a recovery driven by rising real incomes and the easing of restrictive policies.

In addition, French Central Bank chief François Villeroy de Galhau told an Italian newspaper that weak economic growth could increase the risk of inflation falling below the bank’s 2 percent target, indicating that interest rate adjustments may be needed. He predicted further changes to the deposit rate next year and noted that the ECB plans to return to the “neutral” rate at some point by 2025.

Recent data showed that eurozone inflation, as measured by the Harmonized Index of Consumer Prices (HICP), fell below the bank’s target in September, reaching 1.8% over the last twelve months. These figures suggest that the ECB may consider cutting interest rates further, rather than stopping the easing process.

Looking ahead, further interest rate cuts by the Fed could narrow the policy gap between the Fed and the ECB, which could support EUR/USD. The market anticipates two more rate cuts from the ECB and about 50 basis points of easing from the Fed before the end of the year. However, the comparatively better performance of the US economy may limit any significant dollar weakness.

On the euro calendar, German factory orders fell 5.8 percent in August from a month earlier, adding to lingering concerns about the economic outlook of the bloc’s biggest economy.

On another front, non-commercial traders (speculators) reduced their net long positions in the euro to the lowest level since late August, while commercial players reduced their net short positions to a six-week low on the back of a modest drop in open interest.

EUR/USD daily chart

EUR/USD short-term technical outlook

Further declines may encourage EUR/USD to challenge the October low of 1.0950 (October 4) ahead of the weekly low of 1.0881 (August 8).

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

Meanwhile, the pair’s uptrend is projected to continue as long as it remains above the crucial 200-day SMA at 1.0873.

The four-hour chart demonstrates a worsening of the negative trend. The initial resistance level is 1.1082 ahead of the 200-SMA of 1.1099, followed by 1.1143 and 1.1214. On the other hand, the initial support level is 1.0950, followed by 1.0913 and finally 1.0881. The Relative Resistance Index (RSI) has dropped to around 31.