EUR/USD Price Forecast: Corrects further as US Dollar extends recovery
- EUR/USD falls further to near 1.1655 as the US Dollar extends its recovery.
- Investors keenly await the US PCE inflation data and the Jackson Hole Symposium.
- The ECB is expected to hike interest rates in the September meeting.
The Euro (EUR) trades marginally lower against the US Dollar (USD) on Tuesday, extending its corrective move from the four-day high of 1.1711 to near 1.1655 during the European trading session. The major currency pair comes under pressure as the US Dollar recovers further amid caution ahead of the United States (US) Personal Consumption Expenditure Price Index (PCE) data for July and the outcome of the Jackson Hole Symposium.
At press time, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, trades 0.1$ higher to near 99.07.
Financial market experts believe that while caution ahead of key events has offered some ground to the US Dollar, there is no reflection of a change in trend for the currency.
USD upside seen near term even as broader trend stays under pressure
Strategists at Scotiabank highlight that “calendar and event risk this week is significant,” and argue that the backdrop creates “the potential for some moderate gains in the USD broadly in the short run” as investors move to pare back positioning. However, they caution that the broader technical backdrop remains fragile, noting that “technical trends remain bearish and while oscillator signals are showing some moderation in the dollar decline, no reversal is evident at this point.”
Meanwhile, the outlook of the Euro remains broadly firm on expectations that the European Central Bank (ECB) will raise interest rates next month.
Eurozone resilience underpins September ECB hike expectations
Analysts at Nomura continue to look for a September move from the ECB, stating that they “expect the ECB to raise rates in September,” and arguing that “today’s activity data may ease concerns from more dovish policymakers that are keen not to restrict activity more than necessary.” They also highlight the latest ECB Consumer Expectations Survey as a key gauge of medium-term price pressures, noting that “in the July survey, despite the re-escalation of the Iran war in July, 3y ahead median inflation expectations continued to normalise and declined by 0.1pp to 2.7%, whereas 5y ahead median inflation expectations were unchanged at 2.4%.”
EUR/USD Technical Analysis
EUR/USD trades at around 1.1654, maintaining a bullish near-term bias as it holds above the 20-day Exponential Moving Average (EMA) at 1.1577, suggesting buyers remain in control
The Relative Strength Index (14) hovers in firm positive territory near 67, hinting at strong but not yet extreme upside momentum.
On the downside, initial support is the June 15 high at 1.1622, followed by the 20-day EMA at 1.1577. Looking up, the pair needs a decisive break above the August high at 1.1711 to resume the uptrend. On the upside, the major hurdle for the pair will be the May high near 1.1800.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.