- The EUR/USD has again reached the area of its annual highs around 1.1200.
- The dollar recovered only moderately after Powell led a sharp decline.
- The business climate index in Germany fell slightly to 86.6 in August.
EUR/USD paused its multi-week uptrend and came under downward pressure after hitting new highs just above 1.1200 earlier this week. This minor corrective move came amid a cautious resurgence of buying interest in the US dollar (USD).
However, the greenback recovered from its recent 2024 low near 100.50 (August 26), as shown by the US Dollar Index (DXY). This recovery was driven by a decline in risk appetite following a sharp rise on Friday in response to Chairman Jerome Powell’s dovish message at the Jackson Hole Symposium.
It is worth recalling that Powell had suggested it was “time” to change the monetary policy stance, opening the door for a rate cut at the September 18 meeting. Powell argued that the labor market was unlikely to contribute to increased inflationary pressures in the near future, adding that the Fed was not seeking or welcoming a further cooling of labor market conditions.
Thomas Barkin, president of the Federal Reserve in Richmond, pointed out on Monday that the “low hiring and low firing” strategy currently being followed by U.S. companies in their employment decisions is unlikely to last. He stressed the risk that companies could resort to layoffs if the economy weakens. He noted that concerns about the labor market at the Fed have increased in recent weeks. This is a key reason why Powell noted in a speech on Friday that rate cuts are necessary to prevent another, unwanted rise in unemployment.
In line with these potential rate cuts, CME Group’s FedWatch tool indicates that the probability of a 25 basis point cut at the September 18 meeting is nearly 70%.
In addition to the dollar’s daily recovery, US yields rose slightly across various maturities.
Turning our attention now to the European Central Bank (ECB), its financial statements published last week show that while policymakers saw no immediate need to cut interest rates last month, they warned that the issue could be revisited in September given the continued impact of high interest rates on economic growth.
Also on the ECB front, ECB Governing Council member Robert Holzmann suggested that a September rate cut was not certain. He noted that a Fed rate cut could facilitate further rate cuts by the ECB. He also pointed out that inflation remains stubborn in certain areas and warned that the services sector could hinder the achievement of the inflation target. Meanwhile, ECB Chief Economist Philip Lane struck a more cautious tone compared to the Fed, noting that the central bank is making “good progress” in bringing inflation down to its 2% target but may still need a tight monetary policy.
In addition to the ECB’s attention, a new survey published last Thursday showed that there was a significant slowdown in the growth of negotiated wages in the second quarter – a crucial factor in predicting future inflation pressures.
If the Fed decides to cut rates further or by a larger margin, the policy gap between the Fed and the ECB could narrow in the medium to long term, potentially pushing the EUR/USD pair higher, especially as markets expect the ECB to cut rates twice more this year.
In the long term, however, the US economy is likely to perform better than the European one, suggesting that any continued dollar weakness may be only temporary.
On another front, further gains in the single currency seemed to be supported by positioning. Indeed, according to the latest CFTC report, net long positions in the EUR have risen to levels not seen since early June, indicating continued bullish sentiment among speculators. Meanwhile, commercial traders (hedge funds) maintained their net short positions, with contracts reaching multi-week highs. EUR/USD began a strong recovery over the period under review, decisively breaking the psychological 1.1000 mark and reaching new yearly highs, driven by the renewed and significant decline in the greenback.
This week, Germany will be the focus of the calendar, with the release of the final GDP growth rate for Q2, retail sales, preliminary inflation rate and the labor market report. In the Eurozone, the advanced inflation rate will also attract attention.
EUR/USD daily chart
EUR/USD short-term technical outlook
Further north, EUR/USD is expected to reach its 2024 peak of 1.1201 (August 26), ahead of its 2023 peak of 1.1275 (July 18).
The pair’s next downside objective is the weekly low of 1.0881 (August 8), which is ahead of the key 200-day SMA at 1.0848 and the weekly low of 1.0777 (August 1). From here, the low of 1.0666 (June 26) is ahead of the May low of 1.0649 (May 1).
Overall, the pair’s uptrend is likely to continue as long as it stays above the key 200-day SMA.
So far, the four-hour chart shows a slight slowdown in the bullish trend. The initial resistance level of 1.1201 is ahead of 1.1275. However, there is a quick support at 1.1098, supported by the 55-SMA of 1.1078 and then 1.0949. The Relative Strength Index (RSI) dropped to around 62.
