The EUR/USD has come off its highs on the back of a stronger retail sales report from the US than expected. But it remains to be seen whether the stronger data will ignite a dollar rally, when tomorrow the Fed is about to deliver the first of probably three rate cuts before the end of 2025. At the same time, the ECB is most likely done with its rate cuts. This should result in narrowing of yield differentials between the US and Eurozone bonds. At the same time, much of the dollar selling may already be done. So, the EUR/USD upside may be capped but the downside risks are currently low. Thus, I continue to think we will see $1.20 handle soon, meaning my EUR/USD forecast remains bullish.

US retail sales surprise, but does it matter?

Retail sales rose 0.6% on the headline front and 0.7% on the core front in August, both higher than expected. But does it matter? Well, the data suggests it is not all doom and gloom out there, but this is probably too little too late to prevent a rate cut tomorrow. The Fed has clearly signalled it will trim rates and everyone expects them to do so. But the recent dollar selling was never about this week’s likely rate cut. It was all about whether we will get one or two more cuts before the year is out. Well, the jury is still out on that, as surely one retail sales report is unlikely to sway the Fed in one or the other direction.

So, from a rate cut perspective, traders may take the retail sales beat in their stride and continue to buy dips in foreign currencies.

EUR/USD forecast: $1.20 still on bulls’ radars

Earlier today, the dollar was sliding towards its weakest level since July, with the euro climbing 0.5% and brushing against highs last seen in 2021. The policy divergence here is stark — the Fed looks ready to cut into 2026, while the ECB has more or less shut the door on fresh easing. For euro bulls, that’s a recipe for momentum, though I’d caution against assuming Europe’s fundamentals are anywhere near robust, though we had a stronger ZEW survey from Germany this morning to suggest investor sentiment is improving towards the Eurozone’s largest economy.

With the ECB not seen cutting again soon, and the Fed potentially about to start another cutting cycle, this should provide a positive backdrop for the euro, lifting the pair to the summer highs of above 1.1830 in the coming days. So, I still see the EUR/USD potentially reaching for $1.20 in the coming days.

EUR/USD key levels to watch

On the EUR/USD daily chart, support is now seen around 1.1780 initially ahead of the 1.1700 handle next. First line of resistance now comes in at 1.1830, marking the July high. It is possible we could see a false break or double top there, or at least a temporary top before the market resumes higher. Thereafter, I don’t see much resistance until the psychologically important 1.20 handle. I would only drop my technically bullish EUR/USD forecast should rates break the current structure of higher highs and higher lows. Thus, a small pullback will not necessarily signal the end of the bull trend.

— Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R