EUR/USD extends gains to near 1.1150 as Fed outsize rate cut prospects jump

• EUR/USD rises to near 1.1150 as firm Fed large rate cut prospects weigh on the US Dollar.
• The Fed is expected to cut interest rates by 100 bps by year-end.
• ECB policymakers push back against market October rate cut prospects.

EUR/USD extends Monday’s upside to near the crucial resistance of 1.1150 in Tuesday’s European session. The major currency pair exhibits strength at the expense of the US Dollar (USD), which is weighed by increasing bets that the Federal Reserve (Fed) will opt for a large interest-rate cut on Wednesday. 

The US Dollar trades near a year-to-date-low as the market speculation for a large Fed rate cut has been strengthened after softer-than-expected Producer Price Index (PPI) data for August and media reports pointing that officials keep the door open to such a cut. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, hovers near 100.50. 

According to the CME FedWatch tool, the probability of the Fed reducing interest rates by 50 basis points (bps) to 4.75%-5.00% has increased sharply to 69% from 34% a week ago. Apart from the Fed’s interest rate decision, investors will also focus on the dot plot and economic projections. 

The Fed’s dot plot indicates where policymakers see the federal fund rate heading in the medium and long term. Traders see the Fed cutting interest rates by 100 bps to 4.25%-4.50% by year-end, suggesting that the central bank will opt for a large interest rate cut in one of three meetings remaining this year.

In Tuesday’s session, investors will pay close attention to the monthly US Retail Sales data for August, which will be published at 12:30 GMT. Economists estimate the Retail Sales to have grown by 0.2%, slower than the 1.0% increase in July. A slower increase in Retail Sales would indicate a soft inflation outlook.

Daily digest market movers: EUR/USD gains as ECB Kazimir pushes back October rate cut expectations

• EUR/USD rises to near the key resistance of 1.1150 in European trading hours. The major currency pair holds gains as the Euro (EUR) performs strongly as European Central Bank (ECB) officials avoid committing a pre-defined interest rate cut path and prefer to decide on interest rates meeting by meeting.  This occurs amid lingering concerns about economic growth in Germany and a decline in Eurozone inflation to 2.2% in August, the lowest rate in three years.
• Less dovish interest-rate guidance from ECB Governing Council member Peter Kazimir on Monday has also contributed to strength in the Euro. Kazimir pushed back market expectations for the ECB cutting interest rates in October by saying in a blog post: "We will almost surely need to wait until December for a clearer picture before making our next move," Reuters reported. “The ECB needed to be sure that incoming data confirmed its projections. Otherwise, policymakers might regret rushing to cut borrowing costs before inflation has been sustainably defeated,” he added. Also, ECB Governing Council member Gediminas Šimkus said on Tuesday that the probability of an October rate cut is very small.
• Meanwhile, the ZEW Survey – which measures sentiment from institutional investors – showed that Economic Sentiment in the Eurozone has declined significantly to 9.3 in September, the lowest since November 2023. The sentiment data was estimated to have fallen slightly to 17.6 from 17.9 in August.

Technical Analysis: EUR/USD rises further to near 1.1150

EUR/USD gains further to near 1.1150. The major currency pair strengthened after retesting the breakout of the Rising Channel chart pattern formed on a daily time frame near the psychological support of 1.1000. The near-term outlook of the major currency pair has strengthened as the asset steadies above the 20-day Exponential Moving Average (EMA), which trades around 1.1060.

The 14-day Relative Strength Index (RSI) moves higher to near 60.00. A bullish momentum would trigger if it sustains above the aforementioned level.

Looking up, the high of 1.1155 from September 6 and the round-level resistance of 1.1200 will act as major barricades for the Euro bulls. On the downside, the psychological level of 1.1000 and the July 17 high near 1.0950 will be major support zones.