EUR/USD Price Forecast: Extra gains likely above 1.0850

• EUR/USD regained mild upside traction and revisited the 1.1180 region.
• The Dollar faded the auspicious start to the week and retreated modestly.
• Germany’s final GDP figures came in a tad beyond expectations in Q2.

EUR/USD traded in quite a narrow range on Tuesday, leaving behind Monday’s decline and refocusing instead on the upside once again, where recent YTD peaks around 1.1200 await. This minor advanced occurred amid a slight revival of selling interest in the US Dollar (USD).

In fact, the Greenback resumed its bearish trend after Monday’s bounce off its recent 2024 lows near 100.50, as indicated by the US Dollar Index (DXY). This downtick was fueled by a better tone in the risk complex, all against the backdrop of a mixed performance of US yields and a marked uptick in German 10-year bund yields.

Meanwhile, investors remained focused on the prospects of an interest rate cut by the Federal Reserve (Fed) in September, all after Chair Jerome Powell suggested that it might be time to adjust the monetary policy stance, hinting at a potential interest rate cut at the September 18 meeting. He also argued that the labour market is unlikely to contribute to increased inflationary pressures soon and emphasized that the Fed does not desire further cooling in labour market conditions.

Still around the Fed, San Francisco Federal Reserve Bank President Mary Daly argued on Monday that "the time is upon us" to cut rates, reflecting the sentiments expressed by Powell last week. However, she noted that the size of the first rate cut would depend on the data. Daly also mentioned that it is difficult to envision anything that could prevent a rate cut in September from the current range of 5.25%-5.50%.

Aligned with these potential rate cuts, the CME Group’s FedWatch Tool shows nearly a 65% probability of a 25 bps reduction in September.

Turning to the European Central Bank (ECB), its Accounts released last week indicated that while policymakers saw no immediate need to lower interest rates last month, they warned that the issue might be revisited in September due to the ongoing impact of high rates on economic growth.

On this, Board member Klass Knot suggested on Tuesday that the central bank might gradually lower interest rates if inflation continues to decline, though he noted that more data is needed before deciding on a potential cut in September. He stressed a cautious approach, indicating that while there could be a justification for easing policy, a final decision has not yet been made.

Bottom line, if the Fed opts for additional or larger rate cuts, the policy gap between the Fed and the ECB may narrow in the medium to long term, potentially pushing EUR/USD higher, especially since markets expect the ECB to lower rates twice more this year.

However, in the longer term, the US economy is expected to outperform Europe, suggesting that any prolonged weakness in the dollar may be contained.

On another note, further gains in the single currency appeared supported by positioning. Indeed, net long positions in the EUR have risen to levels not seen since early June, according to the latest CFTC report, indicating continued bullish sentiment among speculators. Meanwhile, commercial traders (hedge funds) maintained their net short positions, with contracts reaching multi-week highs. EUR/USD began a strong rebound during the period under review, decisively breaking past the psychological 1.1000 barrier and setting new yearly highs, driven by the renewed and significant decline in the Greenback.

Looking ahead, Germany will be in the spotlight on this week’s calendar, featuring the publication of Retail Sales, advanced Inflation Rate, and the labour market report. In the broader Eurozone, the flash Inflation Rate will also draw attention.

Earlier on Tuesday, Germany's final Q2 GDP Growth Rate came in flat YoY, and contracted by 0.1% vs. the previous quarter. In addition, the Consumer Confidence worsened to -22.0 for the month of September, according to GfK.

EUR/USD daily chart

EUR/USD short-term technical outlook

Further north, EUR/USD is likely to test its 2024 peak of 1.1201 (August 26), which is ahead of the 2023 high of 1.1275 (July 18), and the 1.1300 round level.

The pair's next downward objective is the weekly low of 1.0881 (August 8), which is ahead of the critical 200-day SMA at 1.0850 and the weekly low of 1.0777 (August 1). From here, the low of 1.0666 (June 26) precedes the May bottom of 1.0649 (May 1).

Looking at the big picture, the pair's upward trend should continue as long as it stays above the crucial 200-day SMA.

So far, the four-hour chart indicates a side-lined theme in the upper end of the current range. The initial resistance is 1.1201, before 1.1275. Instead, there is immediate support at 1.1098, reinforced by the 55-SMA at 1.1095, and then 1.0949. The relative strength index (RSI) looked stable around 59.