EUR/USD slips below 1.1100 on US dollar recovery, weak inflation in Spain

• EUR/USD slips below 1.1100 as lower inflation in Spain and six key German states drive expectations of a further ECB rate cut.
• Inflation in the Eurozone and Germany is estimated to have fallen further in August.
• Core US PCE inflation data could influence market expectations for the size of the Fed’s rate cut in September.

EUR/USD is experiencing a sharp sell-off, slipping below support at the round 1.1100 level in the European session on Thursday. The main currency pair extended its correction after some preliminary inflation data from Spain and six key German states showed that price pressures continued to ease in August, increasing bets for a further interest rate cut by the European Central Bank (ECB ). Meanwhile, the U.S. dollar rose further above Wednesday’s high, with the U.S. Dollar Index (DXY) — which tracks the greenback against six major currencies — rising to near 101.30.

The US dollar’s sharp recovery suggests investors are becoming risk-averse with US (US) July Personal Consumption Expenditure (PCE) Price Index data on the horizon. Core inflation data is expected to influence market speculation about the likely size of Federal Reserve (Fed) interest rate cuts in September.

The PCE inflation report is expected to show that annual core inflation rose 2.7 percent in July, faster than the 2.6 percent seen in June. On a month-over-month basis, core PCE is estimated to have risen a steady 0.2%.

In Thursday’s session, investors will focus closely on revised Q2 Gross Domestic Product (GDP) estimates and initial jobless claims data for the week ending August 23 at 12:30 GMT. The revised Q2 GDP estimates are unlikely to impact the US dollar unless a substantial change comes. In Europe, preliminary August inflation data for Germany as a whole will be released at 12:00 GMT.

Investors will also focus on jobless claims data as the Fed is now alert to downside risks to the labor market.. Fed Chairman Jerome Powell promised to support deteriorating labor market strength in his speech at the Jackson Symposium Hole (JH).

Daily Market Reasons: EUR/USD weakens on weaker Euro performance

• EUR/USD extends downside below crucial 1.1100 support in European trading hours. The shared currency pair is weakening due to the underperformance of the euro (EUR) against its major peers as traders appear confident that the European Central Bank (ECB) will cut interest rates in September.
• A sharp slowdown in price pressures in Spain and six key German states boosted bets on a September interest rate cut by the ECB. Spain’s annual harmonized index of consumer prices (IAPC) came in at 2.4%, the slowest year-to-date (YTD).
• Firm speculation for an ECB interest rate cut in September has already been prompted by the steady easing of price pressures in the Eurozone and its weak economic outlook, as suggested by the August HCOB PMI flash report. However, the Eurozone economic sentiment indicator, industry confidence and services sentiment came in better than expected in August. Conversely, Consumer Confidence deteriorated to -13.5 from estimates and the previous release of -13.4.
• The ECB is also expected to offer a further rate cut sometime in the final quarter of the year. Several ECB policymakers appear comfortable with the central bank cutting its key lending rates further this year.
• Dutch policymaker Klaas Knot told a conference panel on Tuesday that “as long as our disinflation trajectory continues to converge towards a return to 2% inflation by the end of 2025 or before the end of 2025, then I I feel comfortable gradually taking my foot off the brake. Asked about expectations for a September rate cut, Knot said: “I’ll have to wait until I have the full set of data and information going into that meeting to decide my position on whether September is appropriate.” adding that “I should do it again in October, December and whenever,” Reuters reported.
• Flash HICP data from Germany and the euro area for August will be released at 12:00 GMT later today and on Friday respectively. German annual HICP is expected to have grown at a slower pace of 2.3% from 2.6% in July. On a month-over-month basis, the HICP is estimated to have remained flat after rising 0.5% in July.

Technical analysis: EUR/USD drops below 1.1100

EUR/USD dips sharply below 1.1100 after failing to extend its rally above the crucial 1.1200 resistance. The short-term outlook for the major currency pair is still firm as all short-term and long-term exponential moving averages (EMAs) are trending higher.

Earlier, the main currency pair strengthened after breaking the Rising Channel formation on a daily time frame.

The 14-day Relative Strength Index (RSI) dipped below 60.00 after turning overbought near 75.00.

On the upside, the recent high of 1.1200 and the July 2023 high at 1.1275 will be the next stop for Euro bulls. The decline is expected to remain muted near the psychological support of 1.1000.

(The story was corrected at 10:25 GMT to say in the first paragraph that “EUR/USD faces sharp sell-off, slipping below 1.1100 round support in Thursday’s European session, not 1.100)