Focus shifts to US PCE inflation following Fed

• The Federal Reserve cut its benchmark rate by 50 basis points.
• United States Personal Consumption Expenditure Price Index Under Review.
• EUR/USD eases ahead of weekly close, but bulls target higher highs.

EUR/USD flirted with the 1.1200 level again this week, but eventually settled around 1.1160, holding modest gains. The pair has been trying to capture the mark since mid-August, pending the Federal Reserve’s (Fed) monetary policy announcement.

The Federal Reserve’s new monetary cycle

The Fed offered a rate cut of 50 basis points (bps), kicking off a new policy cycle in an aggressive manner. As a result, the US dollar (USD) fell sharply, although then Chairman Jerome Powell poured enough cold water to avoid panic action in all financial boards.

The decision was made not only because inflation levels are closer to the Fed’s target of around 2%, but also to support the economy. The Federal Open Market Committee (FOMC) noted that they “gained more confidence that inflation is moving sustainably” toward their target.

As a result, the Summary of Economic Projections (SEP), more commonly known as a dot plot, showed FOMC members anticipating another 50 bps this year, 100 bps cuts in 2025 and 50 bps more in 2026, to a terminal rate of 2.9%. As Powell noted, they are on the way to a more neutral rate.

Powell clarified, however, that future decisions will still depend on macroeconomic data and that they will be taken on a meeting-by-meeting basis. His words of caution kept fears at bay. Following initial rallies on Wall Street, US indices closed with modest losses as the USD regained lost ground, only to resume its slide as the new day began. And it makes perfect sense: Federal Reserve officials opted for an aggressive move amid unspoken concerns about economic progress. The Fed’s decision to keep rates at record levels for longer posed a significant risk to growth. Fortunately for Powell & co, it worked out quite well as the United States (US) is likely to avoid a recession.

Falling government bond yields, with the 2-year Treasury yielding less than the 10-year, is a good sign of confidence about a potential recovery.

The Fed’s key rate is now between 4.75% and 5%. It’s worth remembering that the European Central Bank (ECB) has already cut interest rates, with the reference rate for the Deposit Facility now at 3.5%. Despite the Fed’s aggressive move, it is still better to hold the USD than the Euro.

Europe continues to struggle

Other than that, European data continued to be disappointing. Germany’s ZEW survey showed a sharp contraction in economic sentiment, with the index falling to 3.6 in the country and 9.3 in the euro zone in September. Germany’s current situation rating worsened to -84.5 from -77.3. In addition, the EU confirmed that the Harmonized Index of Consumer Prices (HICP) rose by 2.2% in the year to August, while the monthly increase was revised down to 0.1%. Finally, on Friday, the EU reported that preliminary September consumer confidence improved to -12.9 from -13.5 in August.

Across the pond, the US reported that retail sales rose 0.1% in August, better than the 0.2% decline expected.

The focus shifts to inflation

Next week will start with Hamburg Commercial Bank (HCOB) and S&P Global releasing on Monday preliminary estimates of purchasing managers’ indices (PMIs) for September for the European and US economies.

In addition, on Thursday, the US will release the final estimate for the second quarter of Gross Domestic Product (GDP) and durable goods orders for August. Finally, on Friday, the country will release the August Personal Consumer Expenditure (PCE) Price Index, the Fed’s favorite gauge of inflation. Investors will be looking for divergence in the figure to rush to price what the Fed might do in November. Financial markets are banking on a 25 bps rate cut, but if inflation falls much more than anticipated, it will open the door to speculation of another 50 bps cut.

EUR/USD Technical Outlook

EUR/USD clearly needs to conquer the 1.1200 threshold to confirm what the technical readings suggest: that buyers are in control. On the weekly chart, technical indicators have extended their upslope within positive levels, maintaining their upside strength. At the same time, the pair encountered buyers around a simple moving average (SMA) of 200, providing dynamic support in the 1.1050 price zone. Meanwhile, the 20 and 100 SMAs are grinding north below the longest, reflecting increased buying interest.

EUR/USD is also bullish on its daily chart despite the timing of the pullback. The 20 SMA provides support in the 1.1090 region, while the longer moving averages are higher, well below the shorter one. Finally, technical indicators fell marginally but remain in positive levels.

Support, beyond the mentioned 1.1090 and 1.1050, comes at the 1.1000 threshold, while once above 1.1200, the pair could go towards 1.1240 and 1.1300, with a longer-term target of 1.1470.