EUR/USD retreats as strong US PMI lifts Dollar, Powell in focus

• EUR/USD drops 0.40% as US PMI shows business activity strengthening in August.
• Jobless claims rise to three-month high, signaling labor market cooling.
• Fed officials Hammack, Schmid, and Bostic strike hawkish tone, prioritizing inflation.
• ECB expected to hold rates, while Fed easing bets trimmed; Powell speech Friday to set near-term direction.

EUR/USD retreats some 0.40% during the North American session as the Greenback posts solid gains following the release of economic data from the United States (US). Strong figures regarding business activity outweighed a soft jobs report, pushing traders to trim bets for a Federal Reserve rate cut at the September meeting. The pair trades at 1.1604 after reaching a daily high of 1.1662.

Market sentiment shifted sour as investors await Fed Chair Jerome Powell's speech. S&P Global revealed August's Purchasing Managers Index (PMI) surveys that showed that business activity in the manufacturing and services sectors in the US gained traction and supported the Dollar.

Labor market data in the US shows that it is cooling as the number of Americans filing new applications for unemployment benefits rose to its highest level in the last three months.

The EUR/USD is set to extend its gains due to central bank monetary policy divergence. The European Central Bank (ECB) is projected to hold rates unchanged at the next meeting, while the Fed, although the chances have trimmed, is expected to resume its easing cycle.

Nevertheless, Regional Fed Presidents like Cleveland's Beth Hammack, Kansas City's Jeffrey Schmid, and Atlanta's Raphael Bostic were hawkish earlier, favoring the fight against inflation, as they expressed that risks of the employment mandate remain in the backseat.

Eyes would turn to Powell on Friday. A dovish tilt could push the EUR/USD higher as the interest rate differential would be reduced between the US and the European Union (EU). Otherwise, the Dollar could stage a recovery after reaching yearly lows of 96.37, as depicted by the US Dollar Index (DXY).

Daily digest market movers: EUR/USD on the defensive amid Fed hawkish commentary

• The flash estimate of the US S&P Global Manufacturing PMI jumped to 53.3 in August, far exceeding both forecasts of 49.5 and July's 49.8 reading, signaling robust growth in the sector. Meanwhile, the Services PMI edged slightly lower to 55.4 from 55.7 in July but still came in above expectations of 54.2, pointing to continued strength in services activity.
• US Initial Jobless Claims for the week ending August 16 rose by 235K, well above estimates of 225K. Continuing Claims jumped to 1.972 million, above expectations of 1.96 million.
• Cleveland's Fed Beth Hammack said that she favors maintaining "modestly restrictive policy to lower inflation," and added that the Fed needs to be laser focused on "too high inflation. Hammack said that if the meeting is tomorrow, there is no case for reducing rates.
• Kansas City Fed Jeffrey Schmid commented that the risks of inflation are higher relative to the jobs situation and added that officials would be watching August and September inflation, that policy is modestly restrictive, and that the central bank is in no rush to cut interest rates.
• Atlanta's Fed Bostic said that inflation remains above target, adding that the "Unemployment Rate is consistent with full employment for some time." He has penciled one cut in 2025, as business contacts had said that prices are rising.
• EU's Flash PMIs, as revealed by HCOB, showed that business activity in August showed an improvement in Europe. The HCOB Manufacturing PMI in August rose from 49.8 in July to 50.5. Services activity continued to expand but slowed, from 51.0 in July to 50.7.
• Expectations that the Fed will reduce rates at the September meeting continued to trend lower, down at 72% from 82% in August 20. Across the Atlantic, the ECB is expected to hold rates unchanged, with odds standing at 91% odds for the central bank to keep rates unchanged, and a slim 8% chance of a 25-basis-point (bps) rate cut.

Technical outlook: EUR/USD slumps towards 1.1600 as bears eye 1.1550

EUR/USD continues to trade sideways, but slightly tilted to the downside as price action cleared support at the 20-day Simple Moving Average (SMA) of 1.1608. Momentum has shifted slightly bearish as the Relative Strength Index (RSI) pierced below the neutral line.

That said, the EUR/USD first support is 1.1600. A breach of the latter will expose the 1.1550, 1.1500, and the 100-day SMA at 1.1480 as the next downside target. Conversely, if EUR/USD climbs above 1.1650, the following targets are the August 19 high of 1.1692, and then 1.1700. On further strength, the July 24 high of 1.1788 emerges as key resistance, followed by 1.1800 and the year-to-date high at 1.1829.