EUR/USD Aims to Claim 1.1200 as US Dollar Remains Under Pressure
Overview: EUR/USD Approaching 1.1200 Despite Eurozone Growth Concerns
EUR/USD has gained momentum, reaching the 1.1200 level during European trading hours. Despite growing concerns about the economic outlook in the Eurozone, particularly in the manufacturing sector, the Euro has performed strongly against major peers. Meanwhile, the US Dollar remains on the back foot as expectations for a US Federal Reserve (Fed) rate cut and China’s economic stimulus efforts have weakened demand for the Greenback.
Euro Resilience Amid Eurozone Economic Woes
The Euro’s resilience comes as investors weigh disappointing economic data from the Eurozone. On Monday, the flash HCOB Composite Purchasing Managers Index (PMI), compiled by S&P Global and Hamburg Commercial Bank (HCOB), revealed a contraction, with the index falling to 48.9 in September, the lowest level since January. A reading below 50 indicates a contraction in economic activity, signaling worsening conditions.
The primary driver of the Eurozone’s slowdown has been the deeper contraction in the manufacturing sector of its major economies. Notably, Germany’s HCOB Manufacturing PMI slumped to 40.3 in September, marking its lowest level since September 2023 and extending its contraction for 27 consecutive months. In France, the HCOB Composite PMI also returned to a contraction phase following a temporary boost from the one-off Olympic event in August. Despite these concerning data points, the Euro remains buoyed by broader market sentiment.
EUR/USD Daily Price Chart
Source: TradingView, prepared by Richard Miles
ECB Rate Cut Expectations Weigh on the Euro Outlook
Looking ahead, the Euro will be closely influenced by the market’s expectations surrounding the European Central Bank’s (ECB) monetary policy. With only two ECB policy meetings remaining in 2024, there is widespread speculation that the central bank will implement at least one interest rate cut. The ECB’s dovish outlook reflects concerns over the Eurozone’s economic prospects, with investors expecting the bank to take action to support growth.
Although the expectation of an interest rate cut would typically weaken the Euro, the broader weakness of the US Dollar has offset these concerns, enabling EUR/USD to rise.
US Dollar Under Pressure: Key Market Drivers
China’s Economic Stimulus and Risk Appetite
The US Dollar has faced selling pressure amid rising investor risk appetite, triggered in part by China’s recent economic stimulus announcement. On Tuesday, China revealed a massive stimulus package aimed at reviving its economy, which has been struggling with a prolonged slowdown. This positive news has bolstered global market sentiment, drawing investment away from safe-haven assets like the US Dollar.
Typically, when investors feel confident and willing to take on more risk, demand for the US Dollar declines, as the Greenback is often viewed as a safe-haven currency during times of uncertainty. This shift in sentiment has further supported EUR/USD’s upward trajectory.
Fed Rate Cut Bets Keep USD on the Back Foot
In addition to China’s stimulus, growing expectations of a Federal Reserve rate cut have contributed to the US Dollar’s weakness. The CME FedWatch tool, which tracks market expectations for future Fed policy, indicates that the probability of a 50 basis point (bps) rate cut at the Fed’s November meeting has risen significantly. A week ago, the likelihood of such a cut was 37%, but it has now jumped to 60%.
The Fed’s move to ease policy is rooted in concerns over weakening labor demand and inflation dynamics. The central bank already initiated its policy-easing cycle on September 18 with a larger-than-expected 50 bps rate cut. This dovish pivot has created downward pressure on the US Dollar, supporting the EUR/USD’s gains.
Upcoming US Data to Provide Direction for the US Dollar
Core PCE Inflation Data in Focus
The next major event for the US Dollar will be the release of the US core Personal Consumption Expenditures (PCE) Price Index data for August, scheduled for Friday. The PCE data is the Fed’s preferred gauge of inflation and is closely watched by market participants. Expectations are that core PCE inflation will have increased to 2.7% in August, up from 2.6% in July. Any surprises in the PCE data could sway market expectations for future Fed actions, influencing the US Dollar’s direction.
US Durable Goods Orders
Before the PCE data is released, traders will also monitor the US Durable Goods Orders data for August, due on Thursday. Durable Goods Orders are expected to have declined by 2.6% in August, following a strong 9.8% growth in July. Weaker-than-expected results could further weigh on the US Dollar, reinforcing the likelihood of a Fed rate cut and potentially driving EUR/USD higher.
Technical Analysis: EUR/USD Poised for More Upside Above 1.1200
Key Levels to Watch
From a technical perspective, EUR/USD is nearing a key resistance level at 1.1200, which it is attempting to break decisively. The pair has shown a robust recovery, bouncing off support near the 20-day Exponential Moving Average (EMA) around 1.1100. As long as EUR/USD holds above the breakout level of its Rising Channel chart pattern, which sits near the psychological support of 1.1000, the outlook remains bullish.
However, momentum indicators suggest caution. The 14-day Relative Strength Index (RSI) has dropped to 55.00, indicating that bullish momentum is weakening. Despite this, a successful break above 1.1200 could open the door for further gains, with the next resistance level at the July 2023 high of 1.1276.
Support Levels to Watch
On the downside, key support zones lie at the psychological level of 1.1000 and the July 17 high near 1.0950. These levels are likely to attract buying interest if EUR/USD experiences a pullback, providing a floor for the pair in the short term.
Conclusion: EUR/USD Eyes Further Upside Amid Favorable Conditions
As EUR/USD approaches 1.1200, a mix of favorable global market conditions and US Dollar weakness continues to support the pair’s rise. China’s stimulus efforts, growing bets on a Fed rate cut, and the Eurozone’s evolving economic situation are all shaping the currency pair’s trajectory. Key US data releases, particularly the core PCE inflation data, will provide further direction. Technically, a break above 1.1200 could signal more gains for EUR/USD, though traders should remain cautious as momentum weakens.
