Euro jumps to 10-day high

The euro has posted strong gains on Monday. EUR/USD is trading at 1.1126 in the North American session at the time of writing, up 0.49% today. The euro is at its highest level since Sept. 6.

It’s a quiet day on the data calendar, with no tier-1 events. In the US, the Empire State Manufacturing index rebounded to 11.5 in September, much higher than the August reading of -4.7 and the market estimate of -3.9. This was a shocker as the manufacturer index had contracted nine straight times before today’s reading.

Tuesday will be busier, with German ZEW economic sentiment index and US retail sales. German ZEW economic sentiment plunged to 19.2 in August, down from 41.8 in July. The market estimate for September stands at 17.1. US retail sales are expected to fall to 2.2% y/y in August, down from 2.7% in July.

Fed faces a tough choice – 25 or 50?

This week’s key event is the Federal Reserve meeting on Wednesday, with a 25 basis-point cut practically guaranteed. Will the Fed opt for an oversize 50-bps cut or play it safe with a 25-bps move? The rate cut odds continue to swing wildly. After last week’s producer price index reading, the odds of a 50-bps point cut soared to 41%, up from just 13% before the release, according to the CME’s FedWatch tool. That has increased to 59% today.

The uncertainty over what the Fed will do could last right up to the wire. The Fed is in a quandary as it needs to balance the risk of inflation moving higher against the recent weakness in the labor market. A modest 25-bps cut may not be sufficient to improve the employment picture, while a 50 bps cut might send a message that the Fed believes the economy is in deep trouble.

EUR/USD Technical

• EUR/USD is testing resistance at 1.118. Above, there is resistance at 1.1160
• There is support at 1.1060 and 1.1018

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