EUR/USD ANALYSIS

EUR/USD retreated on Wednesday, falling to a three-month low around the 1.0700 handle, as strong U.S. economic data increased the probability of additional FOMC policy firming in 2023, reinforced the case for a restrictive monetary policy position for an extended period and propelled U.S. Treasury yields upwards, with the 2-year yield comfortably breaking above the 5.0% threshold.

Focusing on catalysts, the ISM non-manufacturing PMI showed that the U.S. services sector grew strongly in August, rising to 54.5 versus the expected 52.5, reaching its highest mark since February, a sign that the U.S. economy remains remarkably resilient and that sturdy demand pressures may prevent inflation from slowing materially towards the 2.0% target in the coming months.

Although the Fed has pledged to “proceed carefully”, upside surprises in macroeconomic indicators could prompt policymakers to reevaluate their “cautious” approach, potentially nudging them towards contemplating additional hikes in 2023 or, at the very least, fully committing to a "higher-for-longer" strategy. This scenario could weigh on EUR/USD, especially if the Eurozone economy weakens further.

FOMC INTEREST RATE EXPECTATIONS

Source: CME FedWatch Tool

https://www.dailyfx.com/news/forex-euro-forecast-eur-usd-on-bearish-path-on-us-exceptionalism-key-levels-ahead-20230906.html