Key Insights
- EUR/USD declines below 1.1050 as USD strengthens following mixed US jobs data
- ECB expected to cut rates by 25bps amid weakening Eurozone economic outlook
- Technically, EUR/USD drops below 20-day EMA, with 1.1000 as key support level
EURUSD Fundamental Outlook
The EUR/USD pair is experiencing downward pressure in Monday’s European session, slipping below the 1.1050 mark as the US Dollar strengthens. This movement comes on the heels of Friday’s mixed US Nonfarm Payrolls (NFP) report for August, which has tempered market expectations for aggressive interest rate cuts by the Federal Reserve this month.
The US Dollar Index (DXY) has made a significant jump, approaching the 101.50 level. This surge can be attributed to the nuanced signals from the latest employment data. While the fresh payrolls came in below expectations, the unemployment rate saw an anticipated decline. Moreover, the Average Hourly Earnings, a crucial indicator of wage growth, outpaced projections.
Market participants have been keenly focused on employment numbers, given the Fed’s apparent confidence in the trajectory of price pressures returning to their 2% target. The slower job demand provides further evidence of moderating US economic growth. However, the pace of decline was less severe than July’s figures, which has somewhat alleviated recession fears and dampened expectations for substantial Fed rate cuts.
According to the CME FedWatch tool, the probability of a 50 basis point (bps) rate cut to 4.75%-5.00% in September stands at 27%, with the majority favoring a more modest 25 bps reduction.
Looking ahead, the US Dollar is likely to face increased volatility this week, with the US Consumer Price Index (CPI) data for August scheduled for release on Wednesday.
Meanwhile, attention in the Eurozone is squarely on the European Central Bank (ECB) policy decision due Thursday. The ECB is widely expected to implement another 25 bps rate cut, marking its second dovish move in the current easing cycle that began in June. This anticipation comes as Eurozone inflation has significantly moderated, with the preliminary Harmonized Index of Consumer Prices (HICP) falling to 2.2% in August, its lowest level since July 2021.
Adding to the bearish sentiment for the Euro, the German economy faces the specter of a technical recession, having contracted in the second quarter with an uncertain outlook for Q3. ECB policymakers have acknowledged this weakness, with board member Piero Cipollone recently warning of the risk of an overly restrictive stance.
EURUSD Technical Analysis
EUR/USD has dipped below 1.1050, failing to maintain its position above the crucial 1.1100 resistance. The near-term outlook has become uncertain as the pair has dropped below the 20-day Exponential Moving Average (EMA) at around 1.1060.
The 14-day Relative Strength Index (RSI) has fallen further to 50.00, indicating a lack of bullish momentum. Support is expected near the psychological level of 1.1000. On the upside, last week’s high of 1.1155 and the round-level resistance of 1.1200 present significant hurdles for Euro bulls.
