Speculators have bought EUR/USD heavily on the view that the ECB will cut rates at a slower rate than the Fed we dont and expect the EUR to fall heavily to the downside.

Interest Rate Outlook Fed v ECB

Markets are also fully priced for a quarter-point cut from the ECB on Thursday but are less sure on whether it will ease in both October and December. "What matters will be guidance beyond September, where there's strong pressure on both sides," (TD Securities) They added:

"Wage growth and services inflation remain strong, emboldening the hawks, while growth indicators are flagging softer, emboldening the doves. Quarterly cuts are likely more consistent with the new projections." (TDS)

The market is looking for 100 bps of cuts from the Fed by year-end but only 75 bps from the ECB even though inflation is falling and the economy in eurozone is far weaker than in the US.

We expect more cuts than the market. Growth in the zone is weak and the economy is facing recession. The ECB will cut rates aggressively to help the economy.

Sentiment

We have seen strong buying by large speculators over the last few weeks and long positions are elevated. On the other side smart money commercial hedgers have sold heavily which points to limited upside and potentially major downside.

Technical Analysis

The key levels of support and resistance to look out for are below.