EUR/USD clings to gains above 1.1100 with Fed minutes in focus

• EUR/USD exhibits strength near 1.1130 ahead of the FOMC minutes of its monetary policy meeting in July.
• The Fed kept interest rates steady for the eighth time in a row in July, but Jerome Powell acknowledged discussions over cuts.
• The ECB is expected to resume its policy-easing cycle in September.

EUR/USD hovers near 1.1130 in Wednesday’s North American session, the highest level seen this year. The major currency pair aims to revisit 2024 highs of 1.1140 as the US Dollar (USD) remains under pressure amid growing optimism over Federal Reserve (Fed) interest rate cuts in September.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, hovers near a fresh seven-month low at around 101.30.

Consistently easing United States (US) inflationary pressures and cooling labor market conditions have convinced investors that the Fed will reduce interest rates in September. However, traders remain split on whether this first interest rate reduction will be a jumbo or a gradual one. The CME FedWatch tool shows that the likelihood of a 50-basis-point (bps) interest-rate cut is at 30.5%. The rest expects a more nuanced 25-basis-point cut.

In Wednesday’s session, investors will focus on the Federal Open Market Committee (FOMC) minutes for the July policy meeting, which will be published at 18:00 GMT. In the July meeting, the Fed left its key borrowing rates unchanged in the range of 5.25%-5.50% for the eighth straight time. The Fed acknowledged that the scope of risks has widened to both aspects of dual mandate (inflation and employment).

This week, the Fed Chair Jerome Powell’s speech on Friday at the Jackson Hole (JH) Symposium – which will be held from Thursday to Saturday  – will be the major event as it will provide fresh cues about rate cuts in September. In the press conference after July’s monetary policy announcement, Jerome Powell said: “If we were to see inflation moving down more or less in line with expectations, growth remains reasonably strong, and the labor market remains consistent with current conditions, then I think a rate cut could be on the table at the September meeting.”

Daily digest market movers: EUR/USD exhibits strength ahead of Jackson Hole Symposium

• EUR/USD stabilizes above the round-level support of 1.1100 as investors have underpinned the Euro (EUR) against the US Dollar. The Euro performs strongly against its major peers amid expectations that the European Central Bank (ECB) will not cut its key borrowing rates aggressively.
• ECB policymakers refrained from committing to a preset course for interest rate reduction as they see inflation in the Eurozone hovering near its current levels, still above target, for the entire year. However, market participants expect that the ECB will cut interest rates again in September, with investors betting on an uncertain economic outlook as Germany, the Eurozone’s largest economy, is going through a rough phase.
• Meanwhile, slower growth in Q2 Negotiated Wage growth in Germany has provided relief to ECB officials, further bolstering optimism over rate cuts in September. The data, released by the Bundesbank – Germany’s central bank – on Tuesday, showed that Negotiated Wages rose by 3.1%, half the pace seen in the first quarter of this year.
• Going forward, investors will keenly focus on preliminary Eurozone HCOB Purchasing Managers’ Index (PMI) data for August and Q2 Negotiated Wage Rates, which will be published on Thursday. The Composite PMI is estimated to have barely improved amid a consistent decline in activities in the manufacturing sector. As for the Negotiated Wage Rate, a key measure of wage growth, it rose by 4.69% in the first quarter of this year and ECB officials would be pleased with a lower reading for the second quarter.

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Technical Analysis: EUR/USD aims to revisit annual highs of 1.1140

EUR/USD approaches a year-to-date high of 1.1140 ahead of the release of the FOMC minutes. The major currency pair strengthened after a breakout of a channel formation on the daily time frame. Upward-sloping 20-day and 50-day Exponential Moving Averages (EMAs) near 1.0970 and 1.0900, respectively, suggest that the broad trend is bullish.

The 14-day Relative Strength Index (RSI) oscillates in the bullish range of 60.00-80.00, suggesting a strong upside momentum.

Euro bulls would approach the round-level resistance of 1.1200 after breaking above the  December 28, 2023, high at 1.1140 decisively. On the downside, the August 15 low at 1.0950 will be a key support area.