EUR/USD falls as Fed appears to cut interest rates gradually

• EUR/USD falls below 1.1050 as the US Dollar strengthens on expectations that the Fed will opt for a small interest rate cut this month.
• Investors are looking to the US CPI on Wednesday for further guidance on interest rates.
• The ECB is expected to cut interest rates this week.

EUR/USD is performing weakly against its major peers on Monday, with investors focused on the European Central Bank (ECB) policy decision, which is set to be announced on Thursday. The ECB is expected to cut its key interest rates again by 25 basis points (bps). This would be the second dovish interest rate decision by the ECB in its current policy easing cycle, which started at the June meeting but kept interest rates unchanged in July.

The ECB is almost certain to cut interest rates this week as price pressures in the Eurozone have been significantly contained and uncertainty about the economic outlook is growing. The preliminary Eurozone Harmonized Index of Consumer Prices (HICP) fell to 2.2% in August, the lowest reading since July 2021. The Eurozone economic outlook is poor due to weak demand from domestic and foreign markets.

The German economy has been in a technical recession as the nation’s growth contracted in the second quarter of this year, and the outlook for the third quarter remains uncertain.

Meanwhile, ECB policymakers have also acknowledged the growing weakness in the German economy and see further interest rate cuts as appropriate for the rest of the year. Last week, ECB council member Piero Cipollone said: “There is a real risk that our stance becomes too restrictive.”

On the economic data front, the Eurozone Sentix Investor Confidence has worsened further to -15.4 in September from -13.9 in August. This appears to be a result of the deteriorating health of the economy amid a slowdown in the German economy.

Market Movers and Daily Moves: EUR/USD Falls Sharply as US Dollar Extends Recovery

• EUR/USD extends its slide below 1.1050 in the European session on Monday. The major currency pair falls as the US Dollar (USD) strengthens following mixed signals on the current health of the labor market from Friday’s US (US) Non-Farm Payrolls (NFP) report for August, which dampened market expectations that the Federal Reserve (Fed) will aggressively cut interest rates this month.
• The US Dollar Index (DXY), which tracks the value of the greenback against six major currencies, jumps near 101.50.
• The official jobs report showed new payrolls were lower than expected, the unemployment rate fell as expected, and average hourly earnings, a key measure of wage growth, grew at a faster pace than projected.
• Market participants focused primarily on the employment figures as the Fed appeared confident that price pressures are on track to return to the central banks’ desired 2% rate. Weaker job demand added to evidence that U.S. economic growth is moderating. Still, the pace of the slowdown was less than the July print, dampening recession fears and bets for big Fed rate cuts.
• According to the CME FedWatch tool, the probability of the Fed cutting interest rates by 50 basis points (bps) to 4.75%-5.00% in September is 27%, while the rest favor a 25 bps rate cut.
• Looking ahead, the US Dollar is expected to see further volatility this week as US Consumer Price Index (CPI) data for August is scheduled for release on Wednesday.

Technical Analysis: EUR/USD drops towards 1.1000

EUR/USD drops below 1.1050 during European trading hours on Monday. The major currency pair weakens after failing to hold above the crucial resistance of 1.1100. The short-term outlook for the shared currency pair has turned uncertain as it has dropped below the 20-day exponential moving average (EMA), which is trading around 1.1060.

The 14-day Relative Strength Index (RSI) drops further to 50.00, suggesting a lack of bullish momentum.

The pair is expected to find support 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 will act as major barriers for the Euro bulls.