Falling euro zone inflation to support an ECB rate cut in September

• German inflation surprised by falling more than expected in August.
• The European Central Bank is likely to maintain its monetary easing path.
• EUR/USD’s corrective decline may continue before the weekly close.

Eurostat will publish the preliminary estimate of the harmonized index of consumer prices in the euro area (HICP) for August on Friday, and the anticipated result will support the case for a further cut in the European Central Bank’s (ECB) interest rate when policymakers meet in September .

The ECB pulled the trigger in June, cutting its three main benchmarks by 25 basis points (bps) each as concerns about economic progress overshadowed inflation concerns. Of course, policymakers did not attribute their decision to growth issues, but they did mention easing price pressures.

And it makes sense, given that the purpose of the central bank is unrelated to economic developments. The ECB’s main task is to maintain price stability, ensuring that inflation remains low, stable and predictable.

Indeed, the reduction in inflation levels helped policy makers to decide on rate cuts. Inflation is currently expected to reach the central bank’s 2% target in 2026.

The HIPC was confirmed at 2.6% YoY in July and is forecast to rise 2.2% in August, while the core annual index is expected at 2.8%, down from the previous increase of 2, 9%

Before the announcement, Germany came a positive surprise. The country released preliminary estimates of August inflation data, which surprised with larger-than-expected declines. The consumer price index (CPI) rose 1.9% from the previous month, below the 2.1% forecast, while the CPI fell 0.1% from the previous month. The Harmonized Index of Consumer Prices (HICP) rose 2.0% in the year to August and fell 0.2% from July.

When will the HICP report be released and how could it affect EUR/USD?

Eurozone’s August preliminary HICP is scheduled to be released at 09:00 GMT on Friday, and given the recently released German figures, there is a strong chance that inflation will come in below expectations. In such a scenario, and through speculation, the ECB could accelerate its monetary easing trajectory, the euro may fall further. However, and as market participants also anticipate an interest rate cut from the Federal Reserve (Fed), both currencies could remain under equal pressure, leading to little action around EUR/USD.

From a technical point of view, the EUR/USD pair has room to extend its decline. After flirting with the 1.1200 level, the pair is currently below the 1.1100 mark and with no technical signs of a change in course.

From a broader perspective, however, the decline appears corrective. On the daily chart, the pair is sharply lower for the second day in a row, but is still developing above a simple moving average (SMA) of 20, which provides dynamic support in the 1.1020 area. Additionally, the 100 and 200 SMAs maintain bullish slopes well below the shortest. Finally, technical indicators have corrected the overbought conditions and are maintaining their downward slope, but still remain in positive levels.

EUR/USD needs to bounce back above 1.1140 to cancel another leg lower and have a chance to retest the 1.1200 price area.

A break below 1.1020, on the other hand, may lead to a slide to the 1.0940-1.0960 area before the weekly close.