- The EUR/USD remains vulnerable below 1.1621 as USD strength still remains despite Monday's pullback move to the upside.
Current Setup
Current sentiment: cautiously bearish EUR/USD.
The pair is up 0.33% on the day and trading around 1.1616. The modest intraday recovery comes as traders who were long USD take profits. However, sentiment still favors USD strength, and that is why this bias for EUR/USD is cautiously bearish. The Euro is getting some support from expectations of a potential rate hike by the European Central Bank in September, especially as renewed tensions between the US and Iran have driven oil prices higher and raised concerns about imported inflation in the Eurozone.Â
Macro Drivers for the EUR/USD
1) Fed Hawkish Expectations
After the Fed Chair’s hawkish comments at the Jackson Hole symposium on Friday, 28 August, markets are now pricing in a much higher probability of a September Fed hike. US bond yields rose sharply, which continues to support the dollar while limiting the EUR/USD’s upside. This upside retracement was capped at 1.1621 on 31 August.
2) The ECB Policy Meeting
The ECB is also expected to raise rates in September in direct response to the hike in oil prices following the renewed tensions in the Middle East. Eurozone yields have also risen sharply, which should be ok to ward off a major euro sell-off unless the ECB disappoints and the Fed’s monetary policy expectations are repriced more hawkishly.
3) Geopolitics
Renewed US-Iran military tensions are keeping Brent crude above $90/barrel. This supports defensive positioning into the dollar, even as the risk of imported inflation makes an ECB rate hike more likely. Geopolitics is clouding the EUR/USD outlook, and the next two weeks should provide additional clarity on the situation.
Price Catalysts This Week
1. Non-Farm Payrolls: The major price catalyst this week is the Non-Farm Payrolls report. A weak payrolls report undermines any September Fed-hike expectations. This could strongly support EUR/USD amid ECB rate-hike expectations. However, a better-than-expected US jobs report favors additional dollar strength.
2. Other Macroeconomic Data: Other price catalysts include the US ISM Manufacturing PMI data and the Eurozone Core CPI Flash Estimates YoY (2.5% consensus vs 2.5% prior).
3. Brent crude prices: This is important to establish the level of defensive positioning into the US Dollars, and also the extent to which any ECB rate hike bets are repriced.
EUR/USD Weekly Forecast Scenarios
Base case: EUR/USD remains under pressure below 1.1640.
Bull case: Euro gets support from hawkish ECB expectations. Additionally, weak US jobs data → fall in Fed hike expectations → weaker USD → allows EUR/USD to rebound toward 1.17.
Bear case: strong US jobs data + higher oil prices + hawkish Fed → reinforces USD strength. EUR/USD breaks 1.1570 and targets 1.1550.
EUR/USD Technical Outlook
Technically, 1.1621 (31 August intraday high) is the next important resistance. Below it, EUR/USD remains vulnerable to 1.1577, followed by the 8 June and 4 August lows at 1.1506. A breakdown of 1.1577 support unlocks the downward path to a retest of the uncapped neckline of the completed double bottom at 1.1506.
On the flip side, a break of 1.1621 clears the pathway to 1.1682. A further move north brings in 1.1743, a potential pitstop before 1.1813 comes into the picture.