The EUR/USD pair is retreating from its weekly high and is experiencing pressure from the U.S. dollar, which shows an emergence of purchases.
Prospects for further tightening of the Federal Reserve's policy continue to support the rise in U.S. Treasury yields, which helps to restore demand for the dollar.
The U.S. central bank may pause its rate hike cycle at the upcoming monetary policy meeting scheduled for September 19–20. However, rate hikes are quite likely by the end of this year, as incoming macroeconomic data from the U.S. continue to indicate economic stability and insufficient inflation reduction as desired by the Fed.
Therefore, the market's attention will be focused on the crucial U.S. Consumer Price Index (CPI) report on Wednesday, which the Fed will use in deciding on rate hikes. Any signs of inflation will confirm expectations of a 25 basis point rate increase, planned for November, and lay the groundwork for the resumption of the recent strong rally in the U.S. dollar.
On the other hand, the eagerly anticipated European Central Bank (ECB) meeting will help investors determine the next stage of the EUR/USD pair's movement. It remains unclear whether the ECB will continue its aggressive policy in the face of very high inflation or pause its historical tightening cycle. Uncertainty regarding the ECB's decision also limits the growth potential of the main currency.
Meanwhile, today's publications of the ZEW Economic Sentiment Index for Germany, along with the dynamics of the U.S. dollar's prices, could create short-term opportunities for the EUR/USD pair.
However, the above-mentioned fundamental backdrop suggests that the path of least resistance for the EUR/USD pair is downward.
Nevertheless, it may be prudent to refrain from placing aggressive bets and prefer to step aside ahead of key news releases.
