Euro Extends Gains as Softer Fed Bets Weigh on Dollar

Key Moments

Euro Builds on Gains as Dollar Index Stays Under Pressure

The EUR/USD pair is extending its recent upswing, adding to last week’s rebound from the key 1.1500 psychological region. The move has attracted follow-through buying for a third straight session, lifting the pair to its highest level in two months during Asian trading. Market participants are now watching to see if buyers can force a sustained break above the 1.1600 handle before committing to new positions, as overall US Dollar (USD) sentiment remains weak.

The USD Index (DXY), which measures the Greenback’s performance against a basket of major currencies, is trading near the lower end of its monthly range. Sentiment toward the USD deteriorated further after soft US data at the end of last week reduced expectations for an immediate interest rate increase by the Federal Reserve (Fed). The US Census Bureau reported that Retail Sales fell 0.6% in July, the largest monthly decline since May last year, signaling a cooling in consumer spending. This comes alongside evidence of easing price pressures, providing the Fed with more room to keep rates unchanged.

Yield Curve Dynamics and Strategist Views on the Dollar

Strategists at Scotiabank pointed to the evolving shape of the US yield curve as a key theme for the USD. They noted that the “steepening US 2/30s yield curve, which has reached 108bps, reflects simmering investor concern about the Fed policy outlook alongside weak US fiscal dynamics.” According to their assessment, this “steepening yield curve represents a further headwind for the USD generally,” supporting their view that “near-term risks are geared towards the DXY slipping back to the mid-98 area.”

ECB Expectations, Geopolitics, and Oil-Linked Inflation Risks

While the Greenback struggles, the euro is finding support from increasing market conviction that the European Central Bank (ECB) will implement one final 25-basis-point rate hike at its September meeting, with inflation still above the 2% target. This policy divergence narrative is helping to underpin EUR/USD.

At the same time, the US-Iran standoff is maintaining a geopolitical risk premium in markets. In addition, inflation concerns tied to volatile oil prices could deter traders from adopting overly aggressive short positions in the USD. These factors may act as a brake on further rapid EUR/USD gains in the near term, even as the overall bias remains constructive for the pair.

Focus Turns to FOMC Minutes for Policy Clues

Attention is now fixed on the upcoming release of the FOMC Minutes on Wednesday, which investors will scrutinize for additional guidance on the Fed’s future policy trajectory. The outcome is expected to play a pivotal role in shaping USD price action and could generate fresh, short-term trading opportunities in EUR/USD.

For now, the prevailing fundamental backdrop suggests that the near-term directional risk for the currency pair is skewed to the upside. Any corrective dips are likely to be viewed as buying opportunities and are expected to remain limited, barring a material shift in the Fed outlook or risk environment.

EUR/USD Technical Picture

From a technical standpoint, EUR/USD is trading just above the 50% Fibonacci retracement of the April-June decline, though upside momentum is still constrained below the 200-day Simple Moving Average (SMA) at 1.1630. The next notable resistance is located at the 61.8% Fibonacci retracement level at 1.1645. A daily close above this resistance band would clear the way for an advance toward 1.1732 and subsequently 1.1843.

On the downside, initial support aligns with the 50% retracement level at 1.1584. A break below that threshold would expose the 38.2% retracement at 1.1522, with deeper support located at 1.1447 and 1.1324.