EUR/USD Price Forecast: Extra consolidation seems on the cards near term

After many days of losses, EUR/USD finally managed to regain some balance and advance to the 1.0940 region at the beginning of the week, ending the session with decent gains amidst the generalized flat-lined mood in the broader FX galaxy.

Across the road, the Greenback traded in a vacillating fashion in the low-103.00s when tracked by the US Dollar Index (DXY), always following the investors’ wide cautious view ahead of the publication of key US fundamentals later in the week.

That said, upcoming US inflation figures tracked by the CPI on Wednesday and Retail Sales due on Thursday should give markets an idea of the Fed's intentions to start trimming its interest rates in September, and maybe by how much. In addition, those readings could also shed further light on how the US economy is faring and, most importantly, if recent recession concerns are well justified.

On a more local perspective, the Economic Sentiment in both Germany and the broader Euroland is expected to recede further in the current month, mirroring the loss of momentum mainly in German economic activity as well as in key sectors in the euro bloc.

While there is still radio silence from the ECB, Fed rate setters are also expected to voice their views as the September gathering gets closer. Over the weekend, FOMC Governor Michelle Bowman moderated her normally hawkish tone, noting "welcome" improvements in inflation in recent months. However, she noted that inflation remains "uncomfortably above" the central bank's 2% objective and is still vulnerable to upward pressure.

Back to a potential rate cut by the Fed in September and the USD, market expectations for a 50 bps reduction lost further traction and hovered around 48%, according to CME Group’s FedWatch Tool. It is worth recalling that the probability of such a scenario was around 70% last week.

If the Fed proceeds with more significant rate cuts, size-wise, the policy gap between the Fed and the ECB could narrow in the medium-to-long term, potentially underpinning some sort of rebound in EUR/USD.

However, in the longer run, the US economy is expected to outperform its European counterpart, suggesting that any weakness in the USD should be seen as merely temporary.

EUR/USD daily chart

EUR/USD short-term technical outlook

Further north, EUR/USD is expected to challenge the August high of 1.1008 (August 5) before reaching the December 2023 top of 1.1139 (December 28).

On the downside, the pair's next target is the 200-day SMA at 1.0834, ahead of the weekly low of 1.0777 (August 1) and the June low of 1.0666 (June 26), all of which are before the May low of 1.0649 (May 1).

Looking at the larger picture, the pair's upward bias should continue if it trades above the critical 200-day SMA.

So far, the four-hour chart indicates the continuation of the range-bound theme for the time being. The initial resistance level is 1.1008, ahead of 1.1132. On the other side, immediate contention is at 1.0881, prior to the 200-SMA of 1.0847, and followed by 1.0777. The relative strength index (RSI) rose above 57.