EUR/USD Retreats as Strong US PMI Lifts Dollar, Powell in Focus

EUR/USD Dips Amid Strong US Data, Hawkish Fed Comments

The EUR/USD pair experienced a noticeable decline of 0.40% during the North American trading session, as the US Dollar strengthened on the back of positive economic data from the United States. The strong performance of the Purchasing Managers' Index (PMI) overshadowed a weaker jobs report, leading traders to reduce their bets on a Federal Reserve rate cut at the September meeting. The pair is currently trading around 1.1604, after reaching a daily high of 1.1662. Market sentiment turned sour as investors eagerly anticipate a speech from Federal Reserve Chairman Jerome Powell. S&P Global's August Purchasing Managers Index (PMI) surveys revealed increased business activity in both the manufacturing and services sectors in the US, providing support for the Dollar. US labor market data indicates a cooling trend, with the number of Americans filing new applications for unemployment benefits rising to its highest level in the past three months. The market is closely monitoring any signals from Powell regarding the future path of monetary policy.

Monetary Policy Divergence Supports the Euro

The EUR/USD is expected to extend its gains due to diverging monetary policies between central banks. The European Central Bank (ECB) is projected to hold rates steady at the next meeting, while the Fed, although the chances of a rate cut have decreased, is expected to resume its easing cycle. Nevertheless, regional Fed presidents such as Cleveland's Beth Hammack, Kansas City's Jeffrey Schmid, and Atlanta's Raphael Bostic have recently adopted a hawkish stance, prioritizing the fight against inflation. They expressed concerns that risks to the employment mandate remain secondary.

Focus on Powell's Speech

All eyes will be on Powell on Friday. A dovish tilt could push the EUR/USD higher as the interest rate differential between the US and the European Union (EU) narrows. Conversely, the Dollar could stage a recovery after reaching yearly lows of 96.37, as indicated by the US Dollar Index (DXY).

EUR/USD Technical Analysis

The EUR/USD continues to trade sideways, with a slight downward bias as price action broke below the 20-day Simple Moving Average (SMA) support at 1.1608. Momentum has shifted slightly bearish, with the Relative Strength Index (RSI) dipping below the neutral line. However, the initial support for the EUR/USD is at 1.1600. A break below this level could expose the 1.1550, 1.1500, and the 100-day SMA at 1.1480 as the next downside targets. Conversely, if the EUR/USD climbs above 1.1650, the subsequent targets are the August 19 high of 1.1692, followed by 1.1700. Further strength could see the July 24 high of 1.1788 emerge as key resistance, followed by 1.1800 and the year-to-date high at 1.1829.