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Summary: The euro (EUR) gained bullish momentum against the U.S. dollar (USD) on Monday, climbing above the 1.0900 level. Improved risk sentiment made it challenging for the U.S. dollar to find demand on Monday, aiding the rise in this asset's price.

Fundamentals

The EURUSD pair reclaimed some of its multi-day losses on Monday, propelling the asset above the key 1.0900 level. This corrective rebound for the EURUSD came after a significant drop from well above the 1.0000 level. Meanwhile, the U.S. dollar continued its corrective trend after reaching a January high of around 103.70 last Friday, despite a slight easing in the U.S. labor market and lower inflation data over the past few months.

Despite recent softening in the U.S. labor market and lower inflation data over the past few months, discussions around the Fed's commitment to maintaining a tightening policy stance over the long term seem to have reignited as a major factor driving heightened risk aversion (benefiting the USD). This is also a response to the resilience displayed by the U.S. economy.

Conversely, in Europe, internal disagreements among members of the European Central Bank's council about continuing tightening measures beyond the summer have been a significant factor causing the euro to weaken again recently. The two risks the Eurozone currently faces are the potential for the ECB to hike rates beyond market expectations or for inflation to remain at levels higher than anticipated by the market.

We believe that the period during which inflation is priced above the ECB's target might be longer than currently priced, potentially causing the ECB to maintain a tightening stance for an extended period. In this phase of fine-tuning policy tightening, a cautious approach is the right course of action (bearish for the Euro).

Technical Analysis

The EURUSD opened slightly higher on Monday after the asset almost touched the 1.0830 support area on Friday, which triggered an exciting rally last month and pushed the asset to a 17-month high of 1.1276. Since then, the asset has seen five consecutive weeks of downward momentum, dropping below the trendline connecting to the September 2022 lows and below the 20- and 50-day exponential moving averages (EMAs).

As the U.S. dollar retraces and the oversold stochastic oscillator indicates diminishing selling pressure, downside momentum appears to be weakening. Furthermore, the price rebounded from near the previous key support at 1.0830 on Friday, making an upside correction possible in the coming sessions. Nevertheless, the Relative Strength Index (RSI) has yet to reach the 30 oversold level and the MACD remains below the 0-axis, suggesting that downside risks remain.

In this current downtrend of EURUSD, from the 4-hour chart perspective, the currency pair has not only broken below the 1.0950 level, the 100 SMA, and the 200 SMA but has also breached the 1.0900 level and tested 1.0845. The currency pair is currently consolidating its downward trend and facing several obstacles. On the upside, the initial resistance lies near the 1.0918 level. The second major resistance is around 1.0930. A close above the 1.0930 resistance could initiate further upside movement. In such a scenario, the currency pair might rise to the 1.0970 level. Any further gains could potentially test the psychological level of 1.1000.

If not, the currency pair might continue lower below 1.0845. The first key support is near the 1.0800 level. Breaking below 1.0800 could lead the currency pair down toward 1.0730.

Overall, EURUSD seems to be seeking a short-term rebound, and unless the asset successfully climbs back above 1.1000, the downtrend might remain intact. In terms of trading strategy, focusing on going short at highs is recommended.

Trading Recommendations

Trading Direction: Short

Entry Price: 1.0950

Target Price: 1.0730

Stop Loss: 1.1070

Valid Until: 2023-09-04 23:55:00

Support: 1.0893, 1.0867, 1.0843

Resistance: 1.0918, 1.0935, 1.0952