The euro is facing mild pressure during Monday's European session, trading around the 1.1560 mark against the US dollar. This slight decline comes as the greenback stages a modest recovery from its post-NFP lows. However, market expectations for a Federal Reserve rate hike in September have cooled significantly, limiting the dollar's upside potential. All attention is now fixed on the upcoming US CPI report for July, due on Wednesday, which is expected to act as a pivotal factor in determining the near-term direction of the EUR/USD pair.
The US dollar is seeing a slight rebound, but its foundation appears shaky. The dollar index, which tracks the currency against six major peers, is trading near the 99.65 level. This uptick is largely attributed to a technical correction following last Friday's sharp decline, rather than a fundamental shift in trend. The disappointing July non-farm payrolls report, which showed a loss of 23,000 jobs versus an expected gain of 80,000, has forced traders to reassess the Fed's interest rate path. According to the CME FedWatch Tool, the probability of a rate hike at the September meeting has now plummeted to just 44%. This suggests a much higher bar for further policy tightening, dampening the dollar's medium-term bullish momentum.
On the euro side, the currency is experiencing a moderate pullback, but its broader upward structure remains intact. The recent dip is more of a technical correction than a reversal of the trend, as the pair had previously approached its monthly high. Key factors supporting the euro include the fading expectations for a Fed rate hike, which has eroded the dollar's interest rate advantage. Meanwhile, the European Central Bank maintains a relatively hawkish stance compared to the Fed. Technically, strong buying interest exists around the 1.1500 support level. Analysts suggest that if the dollar continues to weaken, the euro could target the 1.1620 level.
The market's primary focus is now squarely on the upcoming US CPI report for July. This data release will be the most critical variable in shaping Fed policy expectations and, consequently, the direction of the EUR/USD pair. A higher-than-expected CPI reading would suggest persistent inflation, potentially reviving rate hike expectations and boosting the dollar, which would pressure the euro lower. Conversely, a lower-than-expected print would further weaken the case for a Fed rate hike, likely pushing the dollar down and helping the euro break above the 1.1620 resistance. Until the data is released, the market is expected to be dominated by a cautious, wait-and-see attitude, limiting currency volatility.
From a technical perspective, the EUR/USD pair remains in a short-term uptrend. Key support is located at the 1.1500 level, which is a psychological barrier and a recent low. Short-term resistance is seen in the 1.1580-1.1600 zone. A break above this area would open the path to the next target at 1.1620, near the monthly high. On the downside, if the dollar stages a strong rally on a hotter-than-expected CPI, the pair could test the 1.1500 support. A break below that level could trigger a further decline toward the 1.1450 region. However, before the CPI release, the pair is expected to trade in a firm, range-bound manner.
In conclusion, the euro is experiencing a modest pullback on Monday, primarily due to a technical rebound in the US dollar. However, the significantly reduced expectations for a Fed rate hike in September are providing a solid floor for the euro. The short-term direction of the pair is entirely dependent on the outcome of Wednesday's US CPI data. A cooling inflation reading could propel the euro toward the 1.1620 target, while persistent inflation could trigger a dollar rally, pushing the euro back below 1.1500. Investors are advised to remain on the sidelines and wait for clear directional signals following the data release.
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