EUR/USD Price Forecast: Next on the upside comes 1.1155

EUR/USD gained renewed upward momentum on Monday, fully recouping Friday’s small retracement and breaking above the key 1.1100 hurdle, thanks to the incessant selling pressure on the US Dollar (USD).

On the latter, the US Dollar Index (DXY) retreated for the third day in a row, extending the breach of the key 101.00 support in response to building expectations of a larger interest rate cut by the Federal Reserve (Fed) at its meeting on September 18.

According to the CME Group’s FedWatch Tool, the probability of a 50 bps rate reduction hovered around 60% vs. nearly 30% just a week ago.

In the meantime, the Greenback was further pressured by improved risk sentiment, while US and German yields retreated in line with their peers overseas.

Underpinning the better tone in the European currency, European Central Bank’s (ECB) policymakers seemed reluctant to leave the door open to another rate cut in October.

Furthermore, Vice President Luis De Guindos argued that the ECB anticipates the inflation rate will hover around its 2% target by the end of next year. He also highlighted that high service prices in the euro zone remain a primary concern for the bank. His colleague Peter Kazimir suggested that the ECB should almost certainly wait until December before implementing another interest rate cut. He argued that this cautious approach is necessary to avoid the risk of making a policy error by easing too quickly. Kazimir highlighted that the ECB needs to ensure that incoming data supports its projections to avoid regretting a premature reduction in borrowing costs before inflation has been decisively addressed. Finally, Chief Economist Philip Lane advocated for a gradual approach to interest rate cuts. He noted that while the ECB should continue to lower rates gradually, it does not need to adhere to a fixed schedule, as economic conditions could change between adjustments.

Let’s recall that the ECB's decision to ease monetary policy last week came as a result of its assessment of the inflation outlook and underlying economic dynamics. While the bank did not signal a rate cut in October, it acknowledged that domestic inflation remains elevated.

In her press conference, ECB President Christine Lagarde suggested that the diminishing impact of monetary policy restrictions should benefit the economy, with inflation expected to drop to 2% by 2025. She refrained from committing to specific actions in October, emphasizing that the policy would remain restrictive as long as necessary.

Looking ahead, if the Federal Reserve implements additional or larger rate cuts, the policy divergence between the Fed and the ECB could narrow over the medium to long term, potentially supporting EUR/USD. This is particularly plausible as markets anticipate two more rate cuts from the ECB this year and around 100-125 basis points of easing from the Fed for the remainder of the year.

Pouring some cold water over the above, the US economy is projected to outperform the European economy in the longer term, which might limit any extended weakness in the US Dollar.

Finally, the CFTC report for the week ending September 10 revealed that speculators (Non-Commercial players) have trimmed their net long positions in the Euro to three-week lows around 81.4K contracts, while Commercial traders, such as hedge funds, have also reduced their net short positions to multi-week lows, all amidst a marginal increase in open interest.

EUR/USD daily chart

EUR/USD short-term technical outlook

EUR/USD faces initial resistance at the September high of 1.1155 (September 6), before hitting the 2024 top of 1.1201 (August 26) and the 2023 peak of 1.1275 (July 18).

In the opposite direction, the pair's next downward objective is the September low of 1.1001 (September 11), which is ahead of the preliminary 55-day SMA at 1.0962 and the weekly low of 1.0881 (August 8). The critical 200-day SMA is at 1.0864, prior to the weekly low 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 shows a significant revival in optimistic mood. That said, the initial resistance level is 1.1137, followed by 1.1155 and 1.1190. Instead, there is instant support at 1.1071, ahead of the 200-SMA at 1.1030 and then 1.1001. The relative strength index (RSI) rose to around 67.