EURUSD Outlook: Headwinds Ahead with Stable Dollar and ECB Decision

Key Events

Source: Forex.com Economic Calendar

The ECB’s data-driven, meeting-by-meeting approach is creating a favorable environment for a rate cut in September. Inflation in the eurozone cooled from 2.6% to 2.2% by the end of August, while Germany’s inflation dropped to 1.9%, levels last seen in 2021. These developments, coupled with declining energy prices, are contributing to lower inflation and supporting the likelihood of easing policies across central banks, reinforcing September as a "rate cut month." The Bank of Canada led this trend with a 25bp cut in early September, and the ECB, Fed, and BOE are expected to follow suit.

The ECB’s upcoming policy statement and press conference will likely emphasize its data-dependent strategy, which could lead to heightened market volatility if any unexpected remarks emerge Currently, EURUSD is under pressure due to a stable US Dollar, bolstered by expectations of a 25bp Fed rate cut following stronger-than-expected non-farm payroll data and core CPI in August. The dollar is holding steady near December 2023 lows, leaving the euro vulnerable to further downside risk.

From a Technical Outlook

EURUSD Outlook: EURUSD – 3D Time Frame – Log Scale

Source: Tradingview

The EURUSD recently rebounded from its 2023 highs and is facing a critical resistance level at 1.1220. Failure to break above this level could push the pair down towards the upper boundary of a trendline connecting lower highs between July and December 2023, with initial support at 1.0970.

If EURUSD breaks below that, further downside could take it to 1.0890 and potentially down to the 1.0790 support level. On the upside, a breakout above 1.1220 is needed to confirm a continuation of the uptrend, potentially driving the pair towards the 1.13 range, aligning with July 2023 highs.

--- Written by Razan Hilal, CMT – on X: @Rh_waves