- EUR/USD dropped further and broke below 1.0900 on Thursday.
- The Dollar remained well bid on firm US labour market prints.
- Concerns over a potential US economic slowdown dwindled further.
EUR/USD faced additional selling pressure, adding to the weekly leg lower and revisiting the sub-1.0900 yardstick, or four-day lows. The pair’s negative price action was driven by the ongoing recovery of the US Dollar (USD) and a generally positive sentiment in global stock markets.
That said, the USD Index (DXY) continued its upward trajectory, moving above the 103.50 level and bolstered by a further depreciation of the Japanese yen and another positive day for US yields across the board.
Contributing to the positive outlook for the USD, concerns over an inter-meeting rate cut by the Fed dissipated. This shift was reinforced by robust prints from weekly US Initial Jobless Claims (+233K) as well as by recent remarks from some Fed officials, who suggested that markets may have overreacted to recent US Nonfarm Payrolls readings (+114K in July). They also downplayed the likelihood of a recession while hinting at potential rate cuts to prevent such an outcome.
Meanwhile, in the German fixed-income space, 10-year bund yields continued their weekly rise, although they seem to struggle to overcome the 2.30% barrier for the time being.
Regarding the Fed and the USD, market expectations for a 50 bps rate cut in September still remained in place, with CME Group’s FedWatch Tool indicating nearly a 54% probability of such a move, down from around 65% on the previous day.
If the Fed proceeds with more significant rate cuts, the policy gap between the Fed and the ECB could narrow in the medium term, potentially supporting further gains for EUR/USD.
However, in the long term, the US economy is expected to outperform its European counterpart, suggesting that any weakness in the USD may be temporary.
EUR/USD daily chart
EUR/USD short-term technical outlook
Further north, EUR/USD is likely to test the August high of 1.1008 (August 5), ahead of the December 2023 top of 1.1139 (December 28).
On the downside, the pair’s next objective is the 200-day SMA at 1.0832, which precedes the weekly low of 1.0777 (August 1) and the June low of 1.0666 (June 26), all prior to the May low of 1.0649 (May 1).
Looking at the big picture, the pair’s positive bias should hold if it continues to trade above the crucial 200-day SMA.
So far, the four-hour chart shows some erratic price action. The initial resistance level is at 1.1008 ahead of 1.1132. On the other hand, immediate contention is at 1.0881 ahead of the 200-SMA of 1.0835, and then 1.0777. The relative strength index (RSI) settled around 50.
