EUR/USD Extends Gains to Near 1.1150 as Fed Rate Cut Expectations Surge
EUR/USD Strengthens on Fed Rate Cut Expectations
The EUR/USD currency pair has continued its upward trajectory, rising to approach the significant resistance level of 1.1150 during Tuesday’s European trading session. This extension of Monday’s gains highlights the Euro’s strength as it capitalizes on a weakening US Dollar (USD). The USD’s decline is largely attributed to increasing speculation that the Federal Reserve (Fed) will implement a substantial interest rate cut during its upcoming meeting on Wednesday.
Fed Rate Cut Prospects Weigh on the US Dollar
The US Dollar is trading near its lowest level of the year, driven by growing market expectations for a major rate cut by the Fed. Recent softer-than-expected Producer Price Index (PPI) data for August has bolstered these expectations, alongside media reports suggesting that Fed officials are keeping the possibility of a large rate cut on the table. As a result, the US Dollar Index (DXY), which measures the USD against a basket of six major currencies, is hovering around 100.50.
The CME FedWatch tool indicates a sharp increase in the probability of the Fed reducing interest rates by 50 basis points (bps) to a range of 4.75%-5.00%. This probability has surged to 69%, up from 34% a week prior. Furthermore, traders are anticipating that the Fed will cut rates by a cumulative 100 bps by the end of the year, bringing the federal funds rate down to a range of 4.25%-4.50% by the end of 2024. This expectation reflects a belief that the Fed may opt for a significant rate cut in one of its remaining three meetings this year.
Focus on US Retail Sales Data
Investors are also keenly awaiting the release of the US Retail Sales data for August, scheduled for publication at 12:30 GMT. Economists forecast a modest growth of 0.2%, a slowdown compared to July’s 1.0% increase. A weaker-than-expected Retail Sales figure could signal a softer inflation outlook, further influencing expectations for Fed policy and impacting the USD.
EUR/USD Daily Price Chart
Source: TradingView, prepared by Richard Miles
ECB’s Stance Provides Support for the Euro
The Euro has also been bolstered by less dovish guidance from the European Central Bank (ECB). ECB policymakers have pushed back against market expectations for an October rate cut. On Monday, ECB Governing Council member Peter Kazimir stated in a blog post that the ECB will likely need to wait until December for a clearer picture before making further rate adjustments. Kazimir emphasized the importance of confirming inflation trends before making any hasty decisions to cut borrowing costs. His comments have contributed to the Euro’s strength as the market adjusts its expectations accordingly.
Additionally, ECB Governing Council member Gediminas Šimkus echoed this sentiment, suggesting that the probability of an October rate cut is very low. This cautious approach from the ECB contrasts with the more aggressive rate cut expectations for the Fed, providing further support for the EUR/USD pair.
Eurozone Economic Sentiment and Inflation Trends
Despite the positive outlook for the Euro, there are concerns about economic growth in the Eurozone. The ZEW Survey, which gauges sentiment from institutional investors, showed a significant decline in Economic Sentiment to 9.3 in September, marking the lowest level since November 2023. This decline reflects concerns about the Eurozone’s economic prospects, even as inflation rates in the region have eased.
Eurozone inflation fell to 2.2% in August, the lowest rate in three years. This decrease in inflation could impact the ECB’s policy decisions, but the current focus remains on the Fed’s upcoming meeting and its potential impact on currency markets.
Technical Analysis: EUR/USD’s Path Forward
Technically, the EUR/USD pair has strengthened further, approaching the key resistance level of 1.1150. The pair recently tested and broke out of the Rising Channel chart pattern on a daily time frame, finding support near the psychological level of 1.1000. The short-term outlook for the EUR/USD pair appears bullish as it trades above the 20-day Exponential Moving Average (EMA), which is currently around 1.1060.
The 14-day Relative Strength Index (RSI) is moving higher towards 60.00, indicating potential bullish momentum. If the RSI remains above this level, it could signal further upward movement for the Euro.
Looking ahead, the EUR/USD pair faces resistance at the September 6 high of 1.1155 and the round-level resistance of 1.1200. On the downside, support levels include the psychological mark of 1.1000 and the July 17 high near 1.0950. These levels will be crucial for determining the pair’s near-term direction and potential for further gains.
Conclusion: EUR/USD Poised for Further Gains with Fed Rate Cut Expectations
In summary, the EUR/USD pair has extended its gains as the market anticipates a significant rate cut by the Federal Reserve. The USD’s weakness, driven by expectations of a 100 bps cut by year-end, has provided support for the Euro. Meanwhile, the ECB’s cautious stance on interest rates and recent economic data add to the complex backdrop influencing the EUR/USD pair.
As the market awaits the Fed’s decision and the US Retail Sales data, the EUR/USD pair’s near-term outlook remains bullish, with key resistance and support levels providing crucial guidance for future price action.
