Euro Rallies to Two-Month High as Dollar Loses Ground

EUR/USD is testing the 1.1600 area after three straight sessions of gains, with the dollar losing ground as expectations for another Fed hike fade.

The latest US data haven't helped the dollar. July Retail Sales fell 0.6%, well below expectations, giving traders another reason to question how much room the Fed really has to keep policy tight.

The euro is getting a lift from the other side of the equation as well. Markets are starting to price a higher chance of another ECB hike in September, narrowing the policy gap that had favored the dollar.

That has pushed EUR/USD back to levels last seen two months ago. The 1.1600 area is now the obvious test.

A break higher would keep the recent momentum intact, but after such a quick move, some profit-taking around the level would hardly be surprising.

For now, the dollar remains under pressure, and that is giving the euro some room to breathe. How EUR/USD behaves around 1.1600 could set the tone for the next leg.