EUR/USD Price Forecast: Extra advances look likely near term

EUR/USD maintained its upward momentum well and sound on Thursday, retesting the area of three-week highs around 1.1180.

The pair’s second advance in a row was fuelled by another bearish performance of the US dollar as market participants continued to process Wednesday’s 50-basis-point rate cut by the Federal Reserve (Fed) and the likelihood of extra rate reductions in the latter part of the year.

On the USD-side, the US Dollar Index (DXY) could not sustain an earlier move to as high as the 101.50 region, eventually succumbing to the wave of selling pressure and ending the session well south of 101.00 amidst a drop in US yields in the short end vs. further improvements in the belly and the long end.

Following the FOMC event, it’s uncertain whether the size of the September interest rate cut will be repeated. The updated 'dot plot' indicates an additional 50 basis points of easing this year. Furthermore, the bank’s statement and Chief Powell stressed that the 50 basis point cut was not a reaction to panic.

In contrast, European Central Bank (ECB) officials are maintaining a cautious stance regarding a potential rate cut in October. On this, Bundesbank President Joachim Nagel argued on Wednesday that eurozone inflation remains above acceptable levels, suggesting that interest rates must stay high enough to manage price pressures. While he did not dismiss possible action in December, he acknowledged significant challenges ahead.

It's important to highlight that the ECB's decision to ease monetary policy last week was influenced by its assessment of inflation and economic conditions. Although the ECB did not explicitly indicate a rate cut for October, it recognized that domestic inflation remains elevated. ECB President Christine Lagarde mentioned that the diminishing impact of monetary policy restrictions should benefit the economy, with inflation expected to return to 2% by 2025, though she maintained a cautious outlook on further actions.

Looking forward, if the Fed continues with additional rate cuts, the policy gap between the Fed and the ECB may narrow, potentially supporting EUR/USD. This is particularly plausible as markets anticipate two more rate cuts from the ECB and between 100 and 125 basis points of easing from the Fed by year-end.

However, the US economy is projected to outperform its European counterpart in the long run, which could limit any significant or prolonged weakness in the dollar.

Lastly, the latest CFTC report for the week ending September 10 revealed that speculators reduced their net long positions in the euro to a three-week low of about 81,400 contracts, while commercial traders, including hedge funds, trimmed their net short positions to multi-week lows amid a slight increase in open interest.

EUR/USD daily chart

EUR/USD short-term technical outlook

Further EUR/USD increases are anticipated to encounter early resistance near the September peak of 1.1189 (September 18), before reaching the 2024 high of 1.1201 (August 26) and the 2023 top of 1.1275 (July 18).

Instead, the pair's next downside objective is the September low of 1.1001 (September 11), which is ahead of the temporary 55-day SMA at 1.0975 and the weekly low of 1.0881 (August 8). The critical 200-day SMA is next at 1.0868, ahead of the weekly bottom of 1.0777 (August 1) and the June low of 1.0666.

Meanwhile, the pair's upward trend is projected to continue as long as it remains above the key 200-day SMA.

The four-hour chart reveals a resurgence of the upside bias. That said, the initial resistance level is at 1.1189, followed by 1.1201 and 1.1275. On the other hand, the 55-SMA at 1.1080 provides temporary support, followed by the 200-SMA at 1.1055, and finally 1.1001. The relative strength index (RSI) rose past 61.