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Euro reverses part of the recent weakness against the US Dollar

The Euro (EUR) leaves behind part of the multi-day decline against the US Dollar (USD) on Monday, encouraging EUR/USD to pierce the key 1.0900 barrier and advance to two-day highs. In the meantime, the Greenback extends the corrective knee-jerk after hitting new peaks in August near 103.70 on Friday. The Dollar's weakness relegates the USD Index (DXY) to the 103.20 region despite the move higher in US yields early in the European trading hours. Looking at the broader context of monetary policy, the discussion around the Federal Reserve's stance of maintaining a tighter policy for an extended period seems to have been revived. This is in response to the resilience displayed by the US economy, despite some easing in the labour market and lower inflation readings in recent months.

Within the European Central Bank's realm (ECB), internal disagreements among its Council members regarding the continuation of tightening measures after the summer period are causing renewed weakness for the Euro. Moving forward, markets are expected to maintain a cautious approach in light of the Jackson Hole Symposium and Chairman Jerome Powell’s speech in the second half of the week. On another front, speculative net longs in the EUR climbed to two-week highs in the week ended August 15, according to the latest CFTC report. Data-wise, Producer Prices in Germany contracted at a monthly 1.1% in July and 6.0% over the last twelve months. The period under scrutiny saw EUR/USD come under heavy pressure amidst the multi-week rally in the Greenback helped by stronger-than-expected results in the US docket. EUR/USD manages to stage a decent rebound, with the immediate target at the 1.0900 barrier at the beginning of a new trading week. Despite the current bounce, the pair is still seen under pressure.

In case of further losses, EUR/USD could retest the August 18 low of 1.0844 ahead of the July 6 low of 1.0833. The breakdown of the latter exposes the significant 200-day SMA at 1.0792 ahead of the May 31 low of 1.0635. Deeper down, there are additional support levels at the March 15 low of 1.0516 and the 2023 low at 1.0481 seen on January 6. Occasional bullish attempts, in the meantime, are expected to meet initial hurdle at the August 10 high at 1.1064 prior to the 1.1149 from July 27. If the pair clears the latter, it could alleviate some of the downward pressure and potentially visit the 2023 peak of 1.1275 registered on July 18. Once this region is surpassed, significant resistance levels become less prominent until the 2022 high at 1.1495, which is closely followed by the round level of 1.1500. Furthermore, the positive outlook for EUR/USD remains valid as long as it remains above the important 200-day SMA.