The euro strengthened against the U.S. dollar for a second straight day on Monday, rising as much as 1.6% to 1.0198 in the overnight session before paring some gains to settle around 1.0135 in early afternoon trading, supported mainly by hawkish comments from European Central Bank officials and the risk-on mood in global markets, reflected in the strong rally in both European and U.S. stocks.

In an interview over the weekend, Bundesbank President Joachim Nagel said that policymakers must take “further clear steps” if the inflation profile does not improve, a sign that the ECB could continue to front-load policy adjustments at its October meeting, possibly matching the unprecedented 75 basis points hike delivered last Thursday.

The bullish sentiment on Wall Street also seemed to benefit high-beta currencies, hurting safer plays such as the greenback. The U.S. dollar has been overbought in recent weeks, with the DXY index hitting multi-decade highs earlier this month, so some profit-taking is natural, especially ahead of key U.S. economic data that may alter the prevalent narrative among FX traders.

The U.S. Bureau of Labor Statistics will release its latest consumer price index survey on Tuesday morning (check out the DailyFX Economic Calendar). Headline CPI for August is forecast to decline 0.1% month-over-month, bringing the annual rate to 8.1% from 8.5%, the lowest reading since February. With prices for energy, used cars, hotels, apparel and transportation all in retreat, the official figures could easily come below expectations.

While a downside surprise in the numbers might not change the outcome of the September FOMC meeting, it could cause traders to start discounting a shallower tightening path and even resurrect the "dovish pivot" theory for next year. This scenario could weigh on U.S. Treasury yields, at least in the short term, until we hear from the Fed again. The EUR/USD could take advantage of this situation, extending its rebound in the coming days, although its long-term outlook remains bleak amid growing recession risks in the Eurozone.
 

EUR/USD Technical Analysis

EUR/USD jumped and attacked channel resistance near 1.0200 at the start of the week, but was unable to breach this barrier, with prices retrenching slightly lower from those levels at the time of this writing. For upward momentum to accelerate, the pair must clear this hurdle decisively in the coming days, a situation that could attract new buyers and pave the way for a move towards 1.0370.

On the flip side, if sellers resurface and spark a bearish reversal, initial support appears at 1.0090, followed by the 2022 lows slightly below the 0.9875 area.
 

EUR/USD Technical Chart

(Click on image to enlarge)

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