EUR/USD extends gains around 1.0670, focus on Fed policy decision

• EUR/USD strengthened after soft consumer sentiment data from the US.
• The pullback in the US bond yields is exerting downward pressure on the US Dollar (USD).
• Fed’s likelihood to carry out another rate hike by the end of the year is bolstered by the robust economic data from the US.

EUR/USD initiates the week by extending its gains, trading at higher levels around 1.0670 during the Asian session on Monday. The pair is receiving upward support, likely a result of the downbeat consumer sentiment data from the United States (US) released on Friday.

The preliminary US Michigan Consumer Sentiment Index recorded a reading of 67.7, indicating a decline from the previous figure of 69.5. This reading also fell below the expected figure of 69.1 for the month of September.

US Dollar Index (DXY), which measures the performance of the Greenback against six other major currencies, finished its ninth week with a gain of 0.26%. However, the spot price is trading lower around 105.30. Additionally, US Treasury yields have completely retraced the intraday gains, which is putting pressure on the buck. The yield on the US 10-year bond fell to 4.32% at the time of writing.

Over the past week, key economic data from the US has consistently showcased robust economic conditions. These strong economic indicators reinforce the likelihood of the US Federal Reserve's (Fed) intention to pursue another interest rate hike by the end of 2023.

The Consumer Price Index (CPI), a metric for tracking inflation, surpassed predictions. Furthermore, Retail Sales for the same month and Jobless Claims for the second week of September both unveiled positive results, indicating a favorable economic outlook for the United States.

Market participants will closely monitor the Fed’s interest rate decisions scheduled for Wednesday. Fed is expected to keep interest rates unchanged. Additionally, market participants will pay attention to the central bank's communications, hoping to glean any hints or insights into the potential future direction of interest rates.

On the other side, the European Central Bank’s (ECB) President Christine Lagarde, conveyed on Friday that policymakers did not contemplate the possibility of further rate cuts. Lagarde also indicated that the ECB's intention was to keep interest rates at elevated levels for an extended period and was prepared to raise them if deemed necessary.

This statement reflects the ECB's stance on maintaining a cautious and accommodative monetary policy while remaining open to adjustments if economic conditions require it.

In the upcoming week, there are notable events scheduled for the Eurozone, the Eurozone Harmonized Index of Consumer Prices (HICP) for August will be published on Tuesday. On Friday, the preliminary HCOB Composite PMI for September is expected to be released. Traders will closely monitor these data releases, seeking trading opportunities within the EUR/USD pair.