EUR/USD Climbs to 1.1126 on Fed Rate Cut Speculation: What’s Next?

The EUR/USD pair has been on a strong upward trend during the European trading session, reaching an intraday high of 1.1130. The rally is primarily driven by growing speculation that the U.S. Federal Reserve (Fed) will ease its monetary policies aggressively, weakening the U.S. Dollar (USD).

As a result, the U.S. Dollar Index (DXY) has sharply declined to around 100.70, further boosting the Euro’s strength.

However, mixed performance in the Eurozone, particularly uncertainty over the European Central Bank’s (ECB) future policy decisions, keeps investors cautious. In this article, we break down the key drivers behind the EUR/USD surge and explore what could happen next.

Intraday Update: $EURUSD is now trying to work through the downtrend since the 1.12 test and is making a more concerted push above 1.11.

1.1130's, 50's are the next speedhumps before thinking about another attempt on the 1.12.

Support is now building further at 1.1100 and… pic.twitter.com/AFEe5G5dq4

— Forex Analytix (@forexanalytix) September 16, 2024

1. Fed Rate Cut Speculation Weakens U.S. Dollar

Expectations of Aggressive Policy Easing

One of the primary drivers of the EUR/USD’s recent gains is the mounting expectation that the Fed will ease its policies more aggressively than previously anticipated. According to the CME FedWatch Tool, there is now a 61% chance of a 50-basis point interest rate cut in the September meeting, up from just 30% a week ago.

This shift comes on the back of a softer-than-expected Producer Price Index (PPI) report, which showed inflation rising by just 1.7% year-over-year in August, below estimates of 1.8% and July’s 2.1%.

Reduced short positions equals profit taking.. Looking for dollar strength this week might be justified plus most institutions priced in 50bps cut but that might be too soon and the fed might cut 25bps first leaving the dollar undervalued by 25bps. 25bps cut will push the dollar pic.twitter.com/dJzQsrRC5z

— HaniBadger (@rea_katai) September 16, 2024

The prospect of a dovish Fed has put significant bearish pressure on the U.S. Dollar, as lower interest rates reduce the appeal of the Greenback for investors.

As the DXY continues to slide, currently around 100.70, the EUR/USD pair is gaining traction, pushing toward key resistance levels.

Fed’s Impact on EUR/USD

With the market pricing in a more dovish Fed, the EUR/USD pair has benefited from the weaker USD. A break above the immediate resistance at 1.1125 could open the door for further gains, with potential targets at 1.1151 and 1.1185.

However, traders should remain cautious, as any surprises from the Fed or stronger-than-expected U.S. economic data could reverse the current momentum.

2. ECB Rate Cut Uncertainty Clouds the Euro’s Outlook

ECB’s Recent Policy Decisions

While the weakening U.S. Dollar has given the Euro a boost, uncertainty about the ECB’s future rate cuts has resulted in mixed performance for the Euro against other major currencies.

In its recent meeting, the ECB lowered the Deposit Facility Rate by 25 basis points to 3.50%, offering some support to the Euro. However, ECB officials have not provided a clear path for future rate cuts, leaving markets unsure of the central bank’s next move.

ECB President Christine Lagarde has stated that future rate decisions will depend heavily on economic data, particularly inflation trends. This wait-and-see approach has left investors uncertain, contributing to the Euro’s mixed performance.

Inflation and Economic Concerns

There are reasons to be optimistic about the Euro despite the ECB’s cautious stance. Structural challenges in Germany, such as its exposure to global manufacturing cycles and high energy prices, could push the Eurozone’s largest economy into recession.

Analysts at Nomura highlight that these factors could lead to further ECB intervention to support economic growth.

3. EUR/USD Technical Outlook and Key Levels to Watch

Strong Bullish Momentum with Overbought Signals

The EUR/USD pair is currently trading at $1.11187, up 0.21% on the day, as bullish momentum continues to drive the pair higher. Immediate resistance lies at $1.1125, with additional resistance at $1.1151 and $1.1185.

The pair is comfortably supported above its pivot point at $1.1101, which suggests potential for further upside in the short term.

However, the Relative Strength Index (RSI) is currently at 73, indicating overbought conditions. This could lead to a short-term pullback as traders take profits and reassess the market.

• Resistance Levels: $1.1125, $1.1151, $1.1185
• Support Levels: $1.1072, $1.1049, $1.1017

Support Levels to Watch

On the downside, immediate support is seen at $1.1072, followed by $1.1049 and deeper support at $1.1017. The 50-day Exponential Moving Average (EMA) at $1.1050 is also a key support level, providing further reinforcement for the pair’s bullish trend. If the EUR/USD remains above these levels, the broader outlook will stay positive.

Trading Strategy

Traders are currently looking to enter above $1.11126, with a take-profit target set at $1.11446, positioning the pair for a test of higher resistance levels.

However, a break below the $1.1072 support could signal a potential reversal, inviting selling pressure toward $1.1049 and $1.1017.

Conclusion: What’s Next for EUR/USD?

The EUR/USD pair continues to climb on the back of expectations for aggressive Fed rate cuts and a weaker U.S. Dollar.

While the Euro is benefiting from the Greenback’s slide, uncertainty surrounding the ECB’s future policy moves leaves some caution in the market. Traders should keep a close eye on key technical levels and monitor upcoming Fed and ECB statements for further direction.

$EURUSD up because of two main reasons: the ECB were noncomittal about future cuts & the likelihood of a 50bps cut by the Fed increased.

BUT, with lower Euro growth and inflation outlooks, and the Fed cutting by 25bps can see it drop to 1.095 pic.twitter.com/kFd1rZKys9

— Lago Brian (@Derchi93) September 16, 2024

With overbought conditions indicated by the RSI, a short-term pullback is possible. However, the broader bullish trend remains intact as long as key support levels hold.

In the near term, further gains could be seen if the pair successfully breaks above the $1.1125 resistance level.