- EUR/USD hit fresh 2024 peaks near 1.1170 and retargeted the 1.1200 barrier.
- The Dollar eased further, reaching new YTD lows in the sub-101.00 zone.
- The FOMC Minutes paved the way for a rate cut next month.
EUR/USD extended its gains for the fourth day in a row, building on the optimism from earlier in the week and reaching new 2024 highs around 1.1170, driven by significant weakness in the US Dollar (USD).
The Greenback experienced a further decline, dropping below the key 101.00 support for the first time since December 2023 when tracked by the US Dollar Index (DXY). This decline was accentuated by the FOMC Minutes, which left the door open to an interest rate cut by the Fed in September.
Adding to the ongoing weakness in the Greenback, market participants continued to anticipate a dovish message from Chair Jerome Powell during his upcoming speech at the Jackson Hole Symposium on Friday.
Following the release of July’s Consumer Price Index (CPI), the likelihood of a half-point rate cut by the Fed next month diminished, with a smaller rate cut now considered more probable. This shift was supported by better-than-expected results from other key US economic indicators.
Regarding potential rate cuts, the CME Group’s FedWatch Tool indicates nearly a 60% probability of a 25 bps reduction at the September 18 meeting, down from around 70% on the previous day.
Meanwhile, ECB’s Board member Fabio Panetta argued on Wednesday that the central bank is likely moving towards a period of monetary easing in response to declining inflation and sluggish growth.
Despite the FOMC Minutes supporting the idea of lower rates as soon as next month, Governor Michelle Bowman remained cautious on Tuesday after suggesting gradually lowering interest rates if inflation sustains the Fed’s 2% goal, avoiding overly restrictive monetary policy. She acknowledged elevated inflation and upside risks and highlighted the Fed’s price stability mandate and monitoring of labour market weakening.
If the Fed implements larger rate cuts, the policy gap between the Fed and the ECB could narrow in the medium to long term, potentially driving EUR/USD higher, especially as markets anticipate two additional rate cuts by the ECB this year.
However, looking at the longer term, the US economy is expected to outperform Europe, suggesting that any prolonged weakness in the dollar might be temporary.
Looking ahead, the release of flash PMIs on both sides of the Atlantic will take centre stage on Thursday, seconded by Chair Jerome Powell’s speech at Jackson Hole, and Bank of Japan Governor Kazuo Ueda’s testimony before Parliament.
EUR/USD daily chart
EUR/USD short-term technical outlook
Further north, EUR/USD is likely to test its 2024 high of 1.1173 (August 21), seconded by the 1.1200 round level, and the 2023 top of 1.1275 (July 18).
The pair’s next downward target is the 200-day SMA at 1.0845, followed by the weekly low of 1.0777 (August 1) and the June bottom of 1.0666 (June 26), all of which precede the May low of 1.0649 (May 1).
Looking at the big picture, the pair’s upward trend should continue as long as it stays above the key 200-day SMA.
So far, the four-hour chart has demonstrated a considerable increase in the positive bias. The initial resistance level is 1.1173, which comes before 1.1275. On the other hand, there is immediate support at the 55-SMA of 1.1005, prior to 1.0949 and finally 1.0881. The relative strength index (RSI) surged beyond 83.
