EUR/USD breaks above 200-day SMA as USD consolidates

• EUR/USD rose near 1.0810, above the 200-day SMA of 1.0805.
• The dollar and US yields strengthened after Jerome Powell’s speech on Friday.
• ECB hawks raise EUR.

In the Monday session, the USD is trading weak against most of its rivals, driven mainly by some light consolidation and a risk-friendly market environment. On the other hand, the rhetoric of the European Central Bank’s hawks is gaining more and more ground, while markets continue to evaluate Jerome Powell’s speech on Friday.

During his speech at the Jackson Hole Symposium, Chairman Powell did not commit to a new hike, but he pointed out that the economy has not cooled as expected and that, as long as inflation does not subside, the Federal Reserve (Fed) will maintain the guys in a restrictive stance. In reaction, US yields rallied sharply as, according to CME’s FedWatch tool, investors are now betting on almost a 50% chance of a November hike.

That being said, US bond yields are down this Monday, although they remain elevated. The 2-year Treasury yield stands at 5.05%, while the 5- and 10-year bond rates stand at 4.41% and 4.22%, respectively. On the other hand, the dollar, as measured by the DXY index, fell slightly but continued to trade at its highest level since early June, above the 104.00 area.

On the Euro side, Robert Holzmann of the ECB made it clear earlier in the week that he sees “reasons to continue raising rates without pausing” if no surprises emerge. However, he confirmed that the ECB will continue to depend on the data. Along these lines, investors will be watching the crucial German and EU inflation figures for August, which will be released on Wednesday and Thursday, to continue placing bets on the ECB’s upcoming decisions.

Meanwhile, according to the World Interest Rate Probabilities (WIRP) tool, markets are currently pricing in a 45% probability of a 25 basis point hike at the next meeting on September 14, 2023. Further down the road, the probability of a 25 basis point rise stands at 66% in October, followed by a 75% probability of a similar rise at the December meeting. This expected path of rate hikes would translate into a target rate of 5%.

EUR/USD levels to watch

From a technical point of view, the EUR/USD maintains a short-term bearish outlook, as seen on the daily chart. The Relative Strength Index (RSI) is comfortably positioned in negative territory below its midline. To this is added the negative signal of the moving average convergence divergence (MACD), which shows red bars, a sign of a bearish momentum. Furthermore, the pair is below the 20,100 and 200-day simple moving averages (SMAs), which suggests that bears are firmly in control of the bigger picture.

Support levels: 1.0800 (200-day SMA), 1.0780, 1.0750.

Resistance levels: 1.0830,1.0850, 1.0900.

EUR/USD Daily Chart