EUR/USD slumps as Fed seems to cut interest rates gradually – FXStreet

• EUR/USD fell below 1.1050 as the US Dollar strengthened on expectations that the Federal Reserve will opt for a small interest rate cut this month.
• Investors are awaiting the US Consumer Price Index (CPI) on Wednesday for new guidance on interest rates.
• The ECB is expected to cut interest rates this week.

EUR/USD is trading weaker against major currencies on Monday as investors focus on the European Central Bank's (ECB) policy decision on Thursday. The ECB is expected to cut its key borrowing rate by 25 basis points (bps) again. This will be the second dovish interest rate decision in the ECB's current easing cycle. The ECB began its easing cycle at its June meeting but left rates unchanged in July.

With price pressures in the euro zone significantly subdued and uncertainty over the economic outlook growing, the ECB is almost certain to cut interest rates this week. The preliminary euro zone's Highest Inflation Consumer Price Index (HICP) for August fell to 2.2%, the lowest since July 2021. The euro zone's economic outlook is poor due to weak demand from domestic and international markets.

The German economy is facing a technical recession after growth contracted in the second quarter of the year, and the outlook for the third quarter remains uncertain.

Meanwhile, ECB policymakers acknowledge that Germany's economy is weakening and believe further rate cuts would be appropriate this year. “There is a real risk that our stance could become overly restrictive,” ECB Governing Council member Piero Cipollone said last week.

On the economic data front, the Eurozone Sentix investor confidence index further deteriorated from -13.9 in August to -15.4 in September, likely as a result of worsening economic conditions due to the slowdown in the German economy.

Daily Digest Market Trends: EUR/USD Plunges as US Dollar Continues Recovery

• EUR/USD extended losses below 1.1050 in the European session on Monday, with the US Dollar (USD) strengthening and the major currency pairs declining after Friday's US August Non-Farm Payrolls (NFP) report gave mixed signals about the current health of the labor market. The report dampened market expectations that the Federal Reserve (Fed) would aggressively cut interest rates this month.
• The US Dollar Index (DXY), which tracks the greenback's value against six major currencies, rose to around 101.50.
• The official jobs report showed fewer new hires than expected, the unemployment rate fell as expected and average hourly earnings, a key indicator of wage growth, rose faster than expected.
• Market participants were primarily focused on the employment data, as the Fed appears confident that inflationary pressures are on track to return to the central bank's 2% interest rate target. The slowdown in employment demand added to evidence that the U.S. economy is growing at a slower clip. Still, the pace of decline was slower than it appeared in July, relieving fears of a recession and expectations of a big Fed rate cut.
• According to the CME FedWatch tool, there is a 27% chance that the Fed will cut rates by 50 basis points (bps) in September to 4.75%-5.00%, with the remainder favoring a 25 bps rate cut.
• Looking ahead, we can expect further volatility in the USD this week, with US Consumer Price Index (CPI) data for August due to be released on Wednesday.

Technical reasons why: EUR/USD drops towards 1.1000

EUR/USD dropped below 1.1050 during European trading hours on Monday. The major currency pair fell after failing to rise above the key resistance at 1.1100. The short-term outlook for the common currency pair becomes unclear as it has fallen below its 20-day exponential moving average (EMA) which is trading around 1.1060.

The 14-day Relative Strength Index (RSI) further declined 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 at 1.1155 and the round-level resistance at 1.1200 will act as major obstacles for the EUR bulls.