EUR/USD Price Forecast: Further upside targets the 2024 high around 1.1200

EUR/USD managed to regain further upside impulse and extended its bullish momentum to the vicinity of the 1.1190 region, or three-week highs, on Wednesday.

The extra advance in spot came in response to heightened weakness in the US Dollar (USD), especially following the Federal Reserve’s (Fed) decision of lowering its interest rates by 50 bps.

On the latter, the US Dollar Index (DXY) tumbled to new lows near 100.20 after the Fed went for the jumbo option and lowered its interest rates by 50 basis points. In addition, Fed officials now have a median projection of the Fed Funds rate at 4.4% by the end of 2024, down from the previous estimate of 5.1%. For the end of 2025, their median view is 3.4%, compared to 4.1% previously, and for the end of 2026, the rate is projected at 2.9%, slightly lower than the prior forecast of 3.1%. The FOMC has expressed increased confidence that inflation is moving sustainably toward the 2% target, while assessing that the risks to both employment and inflation goals are more balanced.

Furthermore, policymakers now expect PCE inflation to be 2.3% by the end of 2024, compared to 2.6% in the June projections, with core inflation projected at 2.6%, down from 2.8%. They also anticipate an unemployment rate of 4.4% at the end of 2024 and 2025, up from the current rate of 4.2%. Additionally, GDP growth for 2024 is expected to be 2%, slightly below the June forecast of 2.1%.

At his press conference, Chair Jerome Powell stated that the bank's decision reflects increased confidence in the labour market's continued strength. He noted that the upside risks to inflation have lessened, while the downside risks to the labour market have grown. Powell also remarked that if the economy remains strong and inflation persists, the Fed may opt to reduce rates at a slower pace. He highlighted that the approach to rate cuts could be adjusted, either moving quicker, slower, or pausing, depending on what is deemed appropriate. He cautioned that the current decision should not be interpreted as establishing a new standard pace for policy adjustments.

The Greenback's daily decline was also accompanied by a mixed tone in US yields across different maturities, while 10-year bund yields in Germany added to Tuesday’s rebound and flirted with 2.20%.

Meanwhile, European Central Bank (ECB) policymakers are seen keeping a cautious bias regarding another rate cut in October. That said, Bundesbank President Joachim Nagel indicated on Wednesday that eurozone inflation has not yet been reduced to a level acceptable to the central bank, and hence interest rates must remain high enough to manage price pressures. While Nagel did not rule out possible action in December, unlike several of his colleagues, he noted that considerable obstacles remained.

It’s important to note that the ECB’s decision to ease monetary policy last week was influenced by its assessment of inflation and economic conditions. While the ECB did not explicitly signal a rate cut for October, it acknowledged that domestic inflation remains elevated. ECB President Christine Lagarde noted during her press conference that the waning impact of monetary policy restrictions should help the economy, with inflation projected to return to 2% by 2025, though she maintained a cautious stance on further actions.

Looking ahead, if the Federal Reserve proceeds with extra rate cuts, the policy gap between the Fed and the ECB may narrow, potentially supporting EUR/USD. This is particularly likely as markets expect two more rate cuts from the ECB and between 100 and 125 basis points of easing from the Fed by the end of the year.

However, the US economy is expected to outperform its European counterpart in the long term, which could limit any significant or prolonged weakness in the US Dollar.

Lastly, the latest CFTC report for the week ending September 10 indicated that speculators reduced their net long positions in the euro to a three-week low of around 81,400 contracts, while commercial traders, including hedge funds, trimmed their net short positions to multi-week lows amid a slight increase in open interest.

EUR/USD daily chart

EUR/USD short-term technical outlook

Further EUR/USD advances likely face early resistance around the September high of 1.1189 (September 18), before reaching the 2024 top of 1.1201 (August 26) and the 2023 peak of 1.1275 (July 18).

Instead, the pair's next downward target is the September low of 1.1001 (September 11), ahead of the temporary 55-day SMA at 1.0975 and the weekly low of 1.0881 (August 8). The critical 200-day SMA comes next at 1.0867, prior to the weekly low of 1.0777 (August 1) and the June low of 1.0666.

Meanwhile, the pair's upward trend is projected to continue as long as it remains above the key 200-day SMA.

The four-hour chart reveals a potential for some consolidation in the short-term horizon. That said, the initial resistance level is at 1.1189, followed by 1.1201 and 1.1275. On the other hand, the 55-SMA at 1.1078 provides temporary support, followed by the 200-SMA at 1.1049, and finally 1.1001. The relative strength index (RSI) rose past 64.