EUR/USD consolidates in a range just above mid-1.0500s, upside potential seems limited

• EUR/USD struggles for a firm direction and oscillates in a narrow band on Monday.
• The risk-on impulse undermines the safe-haven USD and lends support to the pair.
• Expectations that further ECB rate hikes may be off the table undermine the Euro.
• Traders look to the US ISM PMI for a fresh impetus ahead of Fed Powell’s speech.

The EUR/USD pair kicks off the new week on a subdued note and oscillates in a narrow trading band, just above mid-1.0500s during the Asian session.

The global risk sentiment gets a goodish lift in reaction to slightly better-than-expected official Chinese PMIs and the passage of a stopgap US government funding bill over the weekend. The upbeat market mood keeps a lid on any meaningful upside for the safe-haven US Dollar (USD) and lends some support to the EUR/USD pair. That said, growing acceptance that the next move by the European Central Bank (ECB) is likely to be a rate cut continues to act as a headwind for the shared currency.

Signs of the beginning of the end of the high inflation in the Eurozone, along with speculations about a possible contraction in GDP during the second half of the year, have been fueling bets that additional ECB rate hikes may be off the table for now. The expectations were reaffirmed by the latest Eurozone consumer inflation figures released on Friday, which showed that that the core gauge, which strips out the volatile categories of food, fell to 4.5% in September from the 5.3% previous.

The US Personal Consumption Expenditures (PCE) data, on the other hand, does little to change the market view that the Federal Reserve (Fed) will continue to tighten its monetary policy. This continues to underpin the USD and hold back bulls from placing aggressive bets around the EUR/USD pair. In fact, the US PCE Price Index rose in line with consensus estimates, to 3.5% over the past twelve months through August from the the previous month’s upwardly revised reading of 3.4%.

That said, the annual Core PCE Price Index – the Fed’s preferred gauge of inflation – eased from the 4.3% (revised from 4.2%) increase recorded in July to 3.9% during the reported month. Meanwhile, the rise in consumer spending, along with surging gasoline prices, points to higher prices going forward. This ensures that the US central bank will stick to its hawkish stance and keep rates higher for longer, which remains supportive of elevated US Treasury bond yields and favours the USD bulls.

Hence, it will be prudent to wait for strong follow-through buying before positioning for an extension of the EUR/USD pair’s modest bounce from sub-1.0500 levels, or a multi-month low touched last week. Traders might also prefer to wait on the sidelines ahead of important US macro data scheduled at the beginning of a new month. A rather busy week kicks off with the release of the US ISM Manufacturing PMI, which, along with a speech by Fed Chair Jerome Powell, will influence the USD price dynamics later during the early North American session and provide some impetus to the pair.

Technical levels to watch