The EUR/USD currency pair exhibited a strengthening trend in early Asian trading on Monday, pushing towards the 1.1720 level. This upward momentum is primarily attributable to a weakening U.S. dollar, as market participants increasingly anticipate that the Federal Reserve will initiate interest rate cuts at its September meeting, potentially even accelerating the pace of such reductions. A more dovish stance from the Fed would typically diminish the attractiveness of the dollar, making it cheaper relative to other currencies and, consequently, boosting the euros value against the greenback. Further supporting the narrative of a weaker dollar, recent U.S. economic data released on Friday painted a subdued picture. Personal spending in May unexpectedly declined for the second time this year, while personal income experienced its largest drop since September 2021, falling by 0.4%. These figures suggest a softening in consumer activity, which could provide the Federal Reserve with additional justification for implementing interest rate cuts sooner and more frequently than previously expected. Such a scenario directly impacts the dollar negatively, creating a tailwind for the EUR/USD pair.
Across the Atlantic, attention will turn to Germany later on Monday with the release of its retail sales and consumer price index (CPI) data. These figures will offer crucial insights into the health of the Eurozones largest economy and could influence the European Central Banks (ECB) policy considerations. While the Federal Reserve appears to be leaning towards easing, ECB Governing Council member Klaas Knots statement on Friday that current interest rates are "at a good level" and his expectation of "at least another 25 basis point cut by the end of 2025" suggest a more measured approach from the ECB. This divergence in policy outlook, with the Fed potentially cutting rates faster than the ECB, could further support the EUR/USD pair. Currently, swap markets are pricing in only one 25 basis point rate cut from the ECB over the next 12 months, with the rate projected to bottom out around 1.75%. From a technical standpoint, the EUR/USD pair continues to display a clear uptrend, marked by a series of higher highs and higher lows, indicating that buyers remain in control of the market. While the 14-day Relative Strength Index (RSI) has entered overbought territory, suggesting the potential for a short-term correction, any such pullback might present a fresh buying opportunity. Should the pair see a decline, it is likely to be viewed as a chance for buyers to re-enter, potentially propelling the exchange rate towards the 1.1800 level. A sustained break above this point could then expose further resistance at 1.1900 and eventually 1.2000. Conversely, if the EUR/USD pair falls below the 1.1700 mark, initial support is anticipated at 1.1653, the daily low from June 26. A break below this support could lead to a further decline towards 1.1600, followed by the 50-day moving average at 1.1515.
