Event Summary (September 2024):
The EUR/USD pair has been showing a mildly bullish trend, recently breaking through the 1.11 resistance level, signaling positive momentum for the euro. The pair now eyes the next significant resistance at 1.1140, a level that could further solidify the euro’s upward trajectory. This upward movement is fueled by a mix of weakening U.S. dollar fundamentals, eurozone economic resilience, and technical factors. If the euro manages to surpass this critical level, further gains could be on the horizon for the currency pair.
Key Factors Driving the Bullish Move
- U.S. Dollar Weakness and Rate Expectations
The U.S. dollar has been under considerable pressure due to ongoing economic concerns and expectations of potential Federal Reserve rate cuts. The most recent ISM Manufacturing PMI for August dropped to 47.2, marking a continued contraction in the U.S. manufacturing sector. This is the second consecutive month of contraction, sparking fears of an economic slowdown. The U.S. Unemployment Rate also ticked up to 3.8% in August from 3.5% in July, further fueling concerns of a decelerating labor market. Inflation, although still a concern, is cooling faster than expected, with the U.S. Consumer Price Index (CPI) moderating to 3.2% in July from 3.6% earlier in the year. With inflation seemingly under control and economic growth slowing, markets are increasingly pricing in a 25 basis point rate cut from the Federal Reserve by the end of 2024. The prospect of lower interest rates reduces the dollar’s attractiveness for investors, giving the euro an edge. - Eurozone Economic Resilience
In contrast, the eurozone is showing signs of relative stability. The eurozone’s current account surplus has improved significantly, supported by robust services exports, which have helped to offset some of the negative effects of slowing industrial production. Germany, the largest economy in the eurozone, posted a current account surplus of €14.5 billion in July, up from €12.3 billion in June, highlighting strong external demand. While inflation remains elevated in some eurozone economies, it has cooled overall to 5.3% in August, down from 5.5% in July. The European Central Bank (ECB) has signaled a more cautious approach to monetary policy compared to the Fed, balancing the need to manage inflation while ensuring growth doesn’t stall. The ECB’s cautious stance on immediate rate cuts has provided a supportive backdrop for the euro, making it more attractive relative to the dollar. - Technical Momentum in EUR/USD
From a technical perspective, the EUR/USD pair’s breach of the 1.11 resistance level is a key development. This move has triggered a more optimistic outlook among traders and analysts. Technical indicators such as the Relative Strength Index (RSI) are not yet in overbought territory, suggesting there could be room for further gains without immediate pullbacks. The next major resistance level lies at 1.1140, and if EUR/USD can break above this, it could set the stage for a rally toward 1.12 or even 1.1250 in the medium term. On the downside, support is expected at 1.1075, and a break below this level could signal a return to a more neutral stance for the pair.
Economic and Market Outlook
- Fed’s Policy Path:
The Federal Reserve’s upcoming meetings will be crucial in shaping the EUR/USD trajectory. If U.S. economic data continues to soften, particularly in areas like employment and manufacturing, the market will likely price in more aggressive rate cuts. As of now, Fed futures markets are indicating a 60% chance of a rate cut by December, with some analysts even predicting the possibility of multiple cuts in 2025 if the U.S. economy slows further. - ECB’s Inflation Concerns:
The ECB’s focus remains on managing inflation, which, though moderating, is still above the target. The eurozone Harmonized Index of Consumer Prices (HICP), which measures inflation across the euro area, showed a slight decrease in August, and further moderation would likely allow the ECB to hold off on immediate rate hikes. However, the ECB will be cautious about cutting rates too soon, given the complex economic environment. - Market Sentiment:
Investor sentiment toward the EUR/USD remains cautiously optimistic. Hedge funds and institutional investors have recently increased their long positions in the euro, reflecting confidence in the eurozone’s relative strength compared to the U.S. Traders are watching closely for signs of economic divergence between the two regions, particularly in relation to central bank actions. Additionally, geopolitical factors such as energy prices and global trade tensions could influence the pair’s performance. The Ukraine conflict continues to pose risks to the eurozone’s energy supply, and any significant disruptions could weaken the euro, even if the region’s current economic fundamentals remain strong.
Conclusion
The EUR/USD is currently riding a wave of optimism, breaking through the 1.11 resistance level and eyeing a potential challenge to 1.1140. A combination of U.S. economic weakness, dovish Fed expectations, and eurozone stability is fueling this upward movement. If the pair can decisively break above 1.1140, further gains toward 1.12 or higher could be in play. However, upcoming economic data from both regions will be crucial in determining the next steps for this key currency pair. Investors should remain alert to central bank announcements, inflation data, and geopolitical developments that could influence the pair’s trajectory in the coming weeks.