EUR/USD holds below 1.1100 as Eurozone and US inflation looms

• EUR/USD is trading sideways below 1.1100 as investors await key inflation data from the Eurozone as well as the US.
• Weak inflation in Germany boosted hopes of another ECB interest rate cut in September.
• The upwardly revised Q2 US GDP slightly reduces the chances of the Fed opting for a bigger rate cut.

EUR/USD is trading in a very tight range below 1.1100 in the European session on Friday, with investors focusing on the Eurozone Rapidly Harmonized Index of Consumer Prices (IACP) for August and the Personal Consumption Expenditure Price Index ( PCE) from the United States (US) for July, which will be published at 09:00 GMT and 12:30 GMT respectively.

The Eurozone HICP report is expected to show headline inflation fell sharply to 2.2% from 2.6% in July due to lower energy prices. Over the same period, the core HICP – which excludes volatile components such as food, energy, alcohol and tobacco – is estimated to have increased by 2.8%, slower than the previous release of 2.9%.

Preliminary inflation data is expected to influence market speculation for the European Central Bank’s (ECB) interest rate cuts in September and, more broadly, the path of policy easing for the rest of the year.

Financial market participants already seem confident that the ECB will cut its key lending rates again in September. The ECB switched to policy normalization in June but left interest rates unchanged in August. Market expectations for a September interest rate cut by the ECB rose sharply after data on Thursday showed price pressures in the eurozone’s largest nation, Germany, returned to 2% for the first time in more than three years. The economy is also exposed to a technical recession, as it contracted by 0.1% in the second quarter of this year, and its economic outlook is vulnerable. Other eurozone economies, such as France and Spain, also saw a significant drop in inflation in August.

“Easing inflationary pressure combined with waning growth momentum provides an almost perfect macro backdrop for a further rate cut,” Carsten Brzeski, global head of macro at ING, said in a note on Thursday.

The ECB is also expected to deliver a further interest rate cut sometime in the last quarter of this year.

Daily Market Reasons: EUR/USD trades sideways ahead of key inflation data

• EUR/USD trades cautiously as the US Dollar (USD) strengthens ahead of US PCE inflation data for July. The US Dollar Index (DXY), which tracks the greenback against six major currencies, is trading slightly below a new weekly high of 101.58.
• Investors are looking to US inflation data for fresh clues about the Federal Reserve’s (Fed) likely monetary policy action at its September meeting. The PCE report is expected to show that year-on-year core inflation rose at a slightly faster pace to 2.7% from 2.6% in June, with the monthly figures up a steady 0.2% .
• Financial markets currently appear to be confident that the Fed will begin cutting interest rates in September. Still, traders remain divided on the potential size by which the Fed will pivot toward policy normalization.
• According to the CME FedWatch tool, data on 30-day Federal Funds Futures prices show that the probability of a 50 basis point (bps) interest rate cut in September is 33%, while the rest favor a 25bps cut.
• The likelihood of a bigger rate cut fell slightly after the US Bureau of Economic Analysis (BEA) reported that the pace at which the economy grew in the second quarter was faster than previously estimated. The agency reported that the economy grew at a robust pace of 3 percent on an annual basis, versus preliminary estimates of 2.8 percent.

Technical analysis: EUR/USD is consolidating below 1.1100

EUR/USD is trading in Thursday’s trading range after holding below the crucial 1.1100 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. The main currency pair also holds the breakout of 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 other hand, a 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.