EUR/USD Price Forecast: Next on the upside comes 1.1275

EUR/USD extended its gains for a third consecutive day, prolonging the optimism seen at the beginning of the week and reaching new highs for 2024 around 1.1120, due to the intense weakness in the US Dollar (USD).

In fact, the Greenback saw a further decline, falling well below the key 102.00 support level and trading at shouting distance from YTD lows on the US Dollar Index (DXY) as investors anticipated the Federal Reserve (Fed) beginning its easing cycle in September as well as a dovish message from Chair Jerome Powell at his speech at the Jackson Hole Symposium on Friday.

After the release of the Consumer Price Index (CPI), expectations for a half-point rate cut by the Fed next month diminished, with a smaller rate cut now considered more likely. This adjustment was supported by better-than-expected results from other important US economic indicators.

Regarding rate cuts, the CME Group’s FedWatch Tool shows a nearly 70% probability for a 25 bps reduction at the September 18 gathering.

In the meantime, the ECB’s Olli Rehn broke the insofar silence surrounding the European Central Bank. He suggested that the bank may need to lower interest rates in September due to economic weakness and the rise in negative growth risks in the euro area. He also emphasized that the expected economic recovery in the eurozone is not guaranteed and that policymakers should be prepared for various scenarios.

Around the Fed, Governor Michelle Bowman expressed caution on Tuesday regarding any changes to central bank policy, citing ongoing upside risks to inflation. She warned that reacting too strongly to a single data point could jeopardize the progress made in controlling inflation.

Back to the Fed: If it implements larger rate cuts, the policy gap between the Fed and the ECB could narrow in the medium to long term, potentially driving EUR/USD higher, especially as markets anticipate two additional rate cuts by the ECB this year.

However, in the long term, the US economy is expected to outperform Europe, suggesting that any sustained weakness in the Greenback might be temporary.

Looking ahead, the FOMC Minutes will be a key focus this week, but investors will also pay close attention to the release of flash PMIs on both sides of the Atlantic, as well as Chair Jerome Powell's speech at Jackson Hole and Bank of Japan Governor Kazuo Ueda's testimony before Parliament.

EUR/USD daily chart

EUR/USD short-term technical outlook

Further north, EUR/USD is expected to challenge its 2024 high of 1.1119 (August 20) before the December 2023 top of 1.1139 (December 28), and the 2023 peak of 1.1275 (July 18).

The pair's next downward target is the 200-day SMA at 1.0843, ahead of the weekly low of 1.0777 (August 1) and the June low of 1.0666 (June 26), all of which come before the May bottom of 1.0649 (May 1).

Looking at the larger picture, the pair's upward trend should continue as long as it remains above the important 200-day SMA.

So far, the four-hour chart has shown a significant increase in the favourable bias. The initial resistance level is 1.1119, which precedes 1.1132 and 1.1275. On the other hand, there is quick support at the 55-SMA of 1.0978, followed by 1.0949, and then 1.0881. The relative strength index (RSI) rose over 80.