Euro Continues to Rally

The Dollar Index (DXY) slipped 0.28% this week to 97.36, while the EURUSD advanced 0.51% to 1.18010. The pair accelerated toward its extreme target of 1.19500–1.20500, closing last Tuesday at 1.18600 and surging to 1.19180 the next day following a 25 bps Fed rate cut.

However, Fed Chair Jerome Powell quickly turned the tide with a sharply hawkish tone. He stressed inflation risks, expressed concern about the labour market, and emphasised the Fed’s independence from the White House, which overshadowed the updated dot plot chart showing two more cuts in 2025. His stance appeared politically charged, clashing with the U.S. President Donald Trump push for faster easing ahead of next year’s congressional elections.

Powell’s rhetoric strengthened the Dollar, pushing EURUSD down for two sessions to a Friday low of 1.17280, erasing the week’s gains. The decline put the bullish structure at risk of reversal, threatening the 1.19500–1.20500 target.

The EURUSD staged a rebound on Monday as markets reassessed Powell’s comments, recognising that absent his hawkishness, the pair would likely already be trading near the target zone. Still, caution prevails with Powell scheduled to speak again on Tuesday, just hours after the release of September PMI data. Wall Street expects a modest slowdown, with manufacturing PMI seen at 52.2 from 53.0 and services at 54.0, down from 54.5 points. Confirmation of weaker activity could undercut Powell’s hawkish narrative.

Technically, the bullish formation remains intact. The break above 1.16000–1.17000 has been confirmed, and the retest of 1.17000 followed by acceleration toward 1.18000 points to further upside. A successful continuation targets 1.19500–1.20500, while a drop below 1.17000 would invalidate the setup.

Large investors remain neutral, with net flows into the WisdomTree Bloomberg US Dollar Bullish Fund (USDU) flat last week. Positioning has lightened considerably, shrinking from $30.3 million in early August to just $12.8 million.

This week’s key risks are Powell’s tone and Friday’s PCE price index release. A dovish tilt would unlock the path toward 1.2000, while renewed hawkishness could trigger another sharp pullback.