The EUR/USD pair was observed trading close to 1.1725 during the European session, indicating its second consecutive increase as the U.S. Dollar Index remained steady around 97.95. The decision was influenced by the markets adjusting to the increased likelihood of a U.S. government shutdown, as funding is scheduled to lapse midweek. The historical context is impacting market sentiment: the Congressional Budget Office projected that the 2018–2019 shutdown resulted in a $11 billion reduction in GDP, and traders anticipate comparable consequences if political gridlock persists. The recent decline of the dollar has allowed the euro to gain some momentum, as buyers re-entered the market following a brief test of the 1.1645 support level last week.
The Personal Consumption Expenditures data for August highlighted the ongoing persistence of inflation. Headline PCE increased by 2.7% year-over-year, a rise from 2.6% in July, whereas core PCE remained steady at 2.9%. On a monthly basis, the headline increased by 0.3%, while the core rose by 0.2%. The current figures continue to exceed the Fed’s 2% target; however, market participants are strongly anticipating further accommodation. The current outlook in the futures markets indicates a 90% probability of a rate cut in October, along with approximately 65% likelihood of a subsequent cut in December. This scenario is contributing to a decline in Treasury yields and diminishing the attractiveness of the dollar. The dovish tilt is providing support for the euro, even as concerns about Europe’s growth outlook persist. The European Central Bank has decided to maintain rates at their current level for two successive meetings, indicating that its easing cycle could be approaching its conclusion. The Eurozone data presents a mixed picture—while the services PMI indicates resilience, the manufacturing sector continues to experience contraction.
Nonetheless, the ECB’s cautious approach has contributed to stabilizing the euro, leading investors to determine that Frankfurt is not expected to introduce additional stimulus while the Fed is gearing up for further easing. The divergence has provided the EUR/USD pair with a relative advantage, enabling it to stabilize in the face of structural challenges within the bloc’s industrial sector. From a charting perspective, EUR/USD is currently positioned just below significant resistance at $1.1740, with the 50-SMA at $1.1734 and the 100-SMA at $1.1737 creating a confluence zone. The pair has demonstrated a recovery from the $1.1650 region, with price action indicating a bullish “three white soldiers” pattern, which is a classic indicator of robust momentum. However, the presence of repeated upper wicks in recent candles indicates a notable selling interest at elevated price levels. Should buyers surpass $1.1740 decisively, the trajectory shifts toward $1.1780 and possibly $1.1820. A breakdown at this level poses a risk of a decline towards $1.1690, with further losses potentially leading to a revisit of $1.1650.
Sentiment indicators indicate that the market is at a critical juncture. The RSI is currently positioned at 57, indicating potential for additional upward movement without reaching overbought levels; however, the situation remains fragile. Market participants are exercising caution as they approach Friday’s nonfarm payrolls release, particularly given the potential for a government shutdown to impede or alter the flow of economic data. The labor report holds significant importance: stronger-than-anticipated hiring could undermine the argument for immediate cuts and support the dollar, whereas a weaker report would validate dovish expectations and elevate EUR/USD.