EUR/USD was under pressure in the early week but recovered in the second half of the week to erase about half of the week’s losses. The pair has been alternating between gains and losses over the past six weeks as upside momentum has slowed near the 1.2000 handle. The upcoming week may be volatile as the Federal Reserve is scheduled to hold a monetary policy meeting that is likely to drive the dollar.
The US consumer price index beat expectations, rising 0.4% in August and 1.9% on an annual basis while core CPI rose 1.7% in the year to August. CPI had fallen short of expectations in the five months ahead the August reading.
There will be a focus on inflation at the Federal Reserve meeting and the latest CPI reading is likely to cause some relief among the FOMC who have been confident that inflation will rise towards 2% targets over the long run despite the recent string of weak inflation data. The futures markets continue to support a third rate hike this year with the Fed Funds futures implying a 67.8% probability of a rate increase in December, up from 44.9% a month ago.
There will also be expectations for the Fed to announce the start of balance sheet normalization as it has been well communicated that policymakers intend to start this month while some members expressed in the minutes from the last meeting that they were ready to begin last month.
Other notable economic releases in the upcoming week include European consumer price index figures, scheduled for release on Monday, and US building permits on Tuesday.
The latest COT report revealed a slight deterioration in euro sentiment after reaching a fresh six-year high last week. In the week to September 12th, non-commercials held the single currency net long by 86,058 contracts, down from 96,309 contracts in the prior week. The shift was mostly attributed to a rise in short positioning while the gross long declined marginally.
EUR/USD held above support at 1.1886 on a daily basis in the past week and while above it, probabilities favor a bullish continuation. The NFP spike high of 1.1979 posted at the start of the month capped Friday’s rally. The level remains the first upside hurdle, especially due to its proximity to the psychological 1.2000 handle. A bullish breach shows the next major hurdle at 1.2070 which marks the August high that also held the exchange rate lower on an attempt earlier this month.
Major support is found at 1.1824 which was resistance in August that held the exchange rate lower on several attempts, as seen on a 4-hour chart.