EUR/USD eases from 1.1200 amid uncertainty ahead of Eurozone and US inflation data

• EUR/USD is under pressure as the euro weakens on firm ECB rate cut prospects.
• The Eurozone’s weak economic outlook supports bets on a September ECB interest rate cut.
• US dollar regains ground with core US PCE inflation data in the spotlight.

EUR/USD is correcting to near 1.1150 in the European session on Wednesday. The major currency pair is falling as the US dollar (USD) regains ground after hitting a new year-to-date (YTD) low this week. The US Dollar Index (DXY), which tracks the value of the greenback against six major currencies, is rising to near 100.80 from new lows of 100.50.

A mild recovery in the US dollar appears to be a short-lived pullback for now, which could be capitalized on as a selling opportunity by market participants. The near-term outlook for the greenback is vulnerable due to optimism that the Federal Reserve (Fed) will begin cutting interest rates in September.

While the Fed’s September rate cuts have been fully applied by traders, bets remain divided on whether the central bank will gradually cut interest rates by 25 basis points (bps) or offer one more than 50 basis points. According to the CME FedWatch tool, 30-day Federal Funds Futures price data shows the probability of a 50 bps rate cut in September is 34.5%, while the rest favor a 25 bps cut.

For fresh clues about the potential size of the rate cut, investors await core United States (US) personal consumption expenditure (PCE) inflation data for July due out on Friday. The PCE price index report is expected to show annual core inflation rose 2.7 percent, up from June’s reading of 2.6 percent, with the monthly figure up 0.2 percent. Signs of further decline in core inflation would prompt expectations that the Fed will take an aggressive policy easing approach. On the contrary, sticky numbers would mitigate this jumbo rate cut scenario.

Daily Market Reasons: EUR/USD drops to near 1.1150 as Euro weakens

• EUR/USD falls from new highs of 1.1200 as Euro (EUR) weakens. The euro is underperforming the majors as investors appear confident that the European Central Bank (ECB) will cut interest rates again in September.
• The ECB began cutting interest rates in June as policymakers appear confident that price pressures in the euro zone will return to the bank’s 2% target in 2025. However, it decided to leave its key lending rates unchanged in July because officials were concerned about an aggressive. the policy easing process could renew inflationary pressures.
• Given evidence from HCOB Eurozone flash PMI for August and Q2 negotiated wage rates that the overall economic outlook is uncertain and wage pressures are easing, the ECB is expected to cut interest rates by 25 bps in September. Traders also see the ECB cutting lending rates again sometime in the final quarter of this year.
• For fresh clues on the path of interest rate cuts, investors await flash data on the Harmonized Index of Consumer Prices (HICP) for August for Germany and the entire euro area, due on Thursday and Friday respectively. Economists expect price pressures to have decelerated.

Technical Analysis: EUR/USD drops to near 1.1150

EUR/USD is down near 1.1150 after making another swing at 1.1200. The broader outlook for the major currency pair remains firm as it maintains the breakout of the symmetrical triangle chart formed on the weekly time frame. The upward-sloping 20-week exponential moving average (EMA) near 1.0900 is more supportive going forward.

The 14-period Relative Strength Index (RSI) is hovering in the bullish range of 60.00-80.00, suggesting strong upside momentum. On the other hand, the July 2023 high at 1.1275 and the January 2022 high of 1.1500 will be the next stops for Euro bulls. The decline is expected to remain muted near the psychological support of 1.1000.