Why the EUR/USD Could be Overextended?

The euro surged to its highest level in a year yesterday, marking a fourth consecutive day of gains, before turning red.

This rally suggests growing market confidence that the eurozone may avoid a hard landing. Recent data supports this sentiment: final inflation figures for July show core inflation, which excludes volatile food and energy prices, holding steady at 2.9%—unchanged from May and June.

But the U.S. dollar is also weakening amid expectations that the Federal Reserve will initiate a series of interest rate cuts, potentially beginning in September.

However, it's not just the Fed eyeing September rate cuts and this might mean that the EURUSD is a little overextended.

Eurozone policymakers have downplayed concerns over persistently high inflation, with minutes from the July meeting revealing an "open mind" towards rate cuts at the September meeting.

Markets now anticipate a roughly 90% chance of a 25-basis-point cut next month, with the possibility of another cut by December.