EUR/USD falls as Fed and ECB rate cut bets swell

• EUR/USD is struggling to extend its rally above 1.1200 as the ECB is expected to cut interest rates again in September.
• Fed Chairman Jerome Powell gives the green light for interest rate cuts in September.
• Investors await core US PCE inflation data for July and Eurozone flash HICP for August.

EUR/USD is down from a new YTD high of 1.1200 in early North American trading hours on Monday. The major currency pair is falling as the euro (EUR) underperforms its majors amid growing speculation that the European Central Bank (ECB) will cut interest rates again at its September meeting. The ECB is also expected to cut another interest rate cut in the final quarter of this year.

Market expectations for an ECB interest rate cut in September have risen due to growing uncertainty about the economic outlook in the eurozone and subdued wage growth. Economic activity in the eurozone rose surprisingly in August, the HCOB PMI flash report showed, but this rebound was largely driven by strong demand in France due to the Paris Olympics. Economists considered it a one-time event and not a structural change.

On the contrary, the ECB’s chief economist, Philip Lane, said at the JH Symposium on Saturday that monetary policy must be tight. Lane acknowledged that the ECB had made some progress on inflation, but also said that success on inflation was not assured, Reuters reported.

For more clues on interest rate guidance, investors will focus on preliminary German and Eurozone Harmonized Index of Consumer Prices (IAPC) data for August, due out on Thursday and Friday respectively. Annual nominal euro area and core HICP, which exclude volatile items, are estimated to have fallen to 2.3% and 2.8% respectively.

Meanwhile, the IFO Institute reported on Monday that Germany’s business climate, current rating and expectations in August beat expectations but remained lower than July’s readings. The reading failed to provide any significant boost to the EUR/USD pair.

Daily Market Reasons: EUR/USD slips as US dollar finds ground

• EUR/USD is correcting from 1.1200, the highest level seen in more than a year, in the late European session on Monday. Still, the broader outlook for the major currency pair is positive as the US dollar (USD) remains on the back foot as a Fed rate cut in September is fully priced in.
• The US Dollar Index (DXY), which tracks the greenback against six major currencies, is finding little buying interest after posting a new year-to-date (YTD) low of 100.53.
• Market expectations for a Fed rate cut in September appear certain, as Fed Chairman Jerome Powell said in his speech at the Jackson Hole Symposium (JH) on Friday: “The time has come for policy to adjust.” Powell’s speech suggested the central bank is more concerned about rising risks in the labor market as it gains confidence that inflation is sustainably on track to the desired 2 percent rate. “We will do everything we can to support a strong labor market,” Powell added.
• Even though the Fed is expected to cut interest rates in September, traders remain divided on its size. According to CME’s FedWatch tool, data on 30-day federal funds futures prices show a 36.5% probability of a 50 basis point (bps) cut in interest rates, while the remaining 63.5% point to a discount of less than 25 bps.
• On the economic data front, investors await the United States (US) durable goods orders data for July, which will be released at 12:30 GMT. Economists forecast that fresh orders for durable goods rose 4% after contracting 6.7% in June.
• This week, the main trigger for the US dollar is likely to be the core US Personal Consumption Expenditure (PCE) Price Index data for July, which will be released on Friday. The Fed’s preferred measure of inflation is expected to have risen at a steady 0.2% month over month.

Technical Analysis: EUR/USD struggles to extend above 1.1200

EUR/USD made a fresh high at 1.1200 on the weekly time frame, suggesting a bullish reversal. The main currency pair consolidated after a breakout of the Symmetrical Triangle chart pattern. The upward sloping 10-week exponential moving average (EMA) near 1.0940 warrants more upside.

The 14-period Relative Strength Index (RSI) is hovering in the bullish range of 60.00-80.00, suggesting strong upside momentum. However, it reached overbought levels around 70.00, increasing the chances of a corrective pullback. On the other hand, the July 2023 high at 1.1275 will be the next target for Euro bulls.