EUR/USD testing key levels amid attempted recoveryBut chart resistances may impede near 1.0174, 1.0259ECB hawishness & Ukrainian military successes citedBut U.S. CPI ahead & Fed implications key short-term

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The Euro to Dollar exchange rate entered the new week with a spring in its step and could look to extend its nascent recovery through the days ahead unless the tentative rebound is scuppered by the possible monetary policy implications of U.S. inflation figures due out on Tuesday.

The Euro rallied and was testing its 55-day moving-average around 1.0145 early in European trading on Monday following hawkish remarks from European Central Bank (ECB) policymakers over the weekend and amid further success for the Ukrainian army as it seeks to evict Russian forces from the country.

"Bundesbank President Nagel overnight reiterated his hawkish comments on further ECB tightening, which spurred EUR/USD to test the 1.01 level in thin Asia trading. Recent Ukrainian military gains may also have contributed to the more positive euro sentiment lately," says Alvin Tan, head of Asia FX FX strategy at RBC Capital Markets.

Multiple officials were cited by Reuters on Sunday when reporting that part of the ECB's Governing Council sees a growing risk that European interest rates may need to rise to 2% or more in order to bring inflation back down the 2% target in the coming years.

The report came just days after the ECB announced the largest increase in interest rates thus far in the history of the monetary union, which took the once negative deposit rate up to 0.75%, although it did the single currency few, if any favours on the day.

Above: Euro to Dollar rate shown at 4-hour intervals with Fibonacci retracements of early August fall indicating possible areas of technical resistance.

"G10 central banks are now more in sync with the scale of tightening being undertaken by the Fed Spreads have been generally moving against the dollar of late," says Derek Halpenny, head of research, global markets EMEA and international securities at MUFG.

"Add to that the growing expectation that Europe will tackle President Putin’s curtailment of energy supplies to Europe head-on with huge fiscal support and you have a combination that is more favourable for risk and more bearish for the US dollar," Halpenny and colleagues also said.

One other factor helping to drive the Euro higher may be the unfolding catastrophe for Russian armed forces in Ukraine where they would appear to sinking into a special military quagmire following a counterattack by the Ukrainian army that is said to have resulted in the overrunning of several strategically important Russian strongholds.

This is after Russian state television reportedly acknowledged on Friday that its armed forces have suffered significant defeats near Ukraine’s second largest city Kharkiv, according to a report from Reuters, with even Russian officials describing the action as a “substantial victory” for Ukrainian forces.

"Since the beginning of September, about 2,000 kilometers of our territory have already been liberated. These days, the Russian army is showing its best – showing its back," President Volodymyr Zelenskyy said on Saturday.

Above: Euro to Dollar rate shown at daily intervals with Fibonacci retracements of late June fall indicating possible areas of technical resistance.

It would likely be very positive for European currencies if the Russian defeats and Ukrainian victories mark the beginning of the end of the conflict in Ukraine, which has caused immense economic disruption alongside all of the human suffering resulting directly from the invasion.

However, that's not yet clear and all currencies will in any case be sensitive this week to the details of U.S. inflation figures due out on Tuesday, which could shape the stance of Federal Reserve monetary policy ahead of its September interest rate decision next week.

"On Friday the Fed's Christopher Waller gave a speech highlighting that 4% would be the right Fed level for the turn of the year - and this assumed that inflation would be slowing. He recalled the Fed's quarterly economic projections which assumed that core PCE would have fallen to 4.3% year-on-year by the end of the year," says Chris Turner, global head of markets regional head of research for UK & CEE at ING.

"The point here is that Waller felt that 4% would be appropriate if inflation slowed to 4.3% - if not the Fed funds rate should be taken into even more restrictive territory. On that subject, the US data highlight of the week is tomorrow's release of August CPI. While lower gasoline prices should bring headline CPI lower, core inflation should still be rising," Turner and colleagues said on Monday before warning of a possible rebound by the Dollar later in the week.

U.S. inflation has moderated in recent months but not by enough to convince the Fed that it will recede far enough for it to meet the 2% inflation target anytime soon while the latest commentary from Fed policymakers suggests that rate setters have become more hawkish in recent weeks, not less.