EUR/USD gave away part of the strong upward momentum seen at the beginning of the week driven by renewed buying pressure on the US Dollar (USD).
That said, the US Dollar Index (DXY) experienced some respite after three consecutive daily declines, coming close to the key 101.00 barrier level despite rising speculation for a 50-bps interest rate cut by the Federal Reserve (Fed) at its upcoming meeting on September 18.
The Greenback‘s daily recovery was also underpinned by an acceptable rebound in US yields across different time frames, while 10-year bund yields also recorded decent gains after two straight days of losses.
Meanwhile, the European Central Bank (ECB) policymakers remained cautious about signaling another rate cut in October.
Still around the ECB, Board member Gediminas Simkus expressed his support on Friday for two additional interest rate cuts this year, along with "significantly" more in the future as inflation trends back toward the bank’s 2% target.
It's important to note that the ECB's decision to ease monetary policy last week was based on its assessment of inflation and economic dynamics. Although the bank did not signal a rate cut in October, it acknowledged that domestic inflation remains high. In her press conference, ECB President Christine Lagarde indicated that the diminishing impact of monetary policy restrictions should benefit the economy, projecting inflation to drop to 2% by 2025, while maintaining a cautious stance on future actions.
Looking ahead, if the Federal Reserve implements further or larger rate cuts, the policy divergence between the Fed and the ECB may narrow, potentially supporting EUR/USD. This is particularly likely as markets anticipate two more rate cuts from the ECB and around 100-125 basis points of easing from the Fed by year-end.
However, the U.S. economy is expected to outperform its European peer in the longer run, which could limit significant or sustained weakness in the US Dollar.
Finally, the latest CFTC report for the week ending September 10 revealed that speculators have reduced their net long positions in the euro to three-week lows around 81,400 contracts, while commercial traders, including hedge funds, have also cut their net short positions to multi-week lows amid a slight increase in open interest.
EUR/USD short-term technical outlook
Further gains in EUR/USD should meet early resistance at the September top of 1.1155 (September 6), before hitting the 2024 peak of 1.1201 (August 26), and the 2023 high of 1.1275 (July 18).
Instead, the pair's next downward target emerges at the September low of 1.1001 (September 11), which anticipates the temporary 55-day SMA at 1.0969 and the weekly low of 1.0881 (August 8). The critical 200-day SMA is at 1.0866 and comes ahead of the weekly low of 1.0777 (August 1) and the June low of 1.0666.
Meanwhile, the pair's rising trend is expected to continue as long as it is above the important 200-day SMA.
The four-hour chart shows that the uptrend appears to have bumped into a decent hurdle ahead of 1.1150 so far. Against that, the initial resistance level remains at 1.1155, followed by 1.1190 and 1.1201. On the flip side, the 55-SMA at 1.1073 provides transitory support, seconded by the 200-SMA at 1.1038 and then 1.1001. The relative strength index (RSI) broke below the 60 yardstick.
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