US inflation and the European Central Bank are in the spotlight

• Warm US employment data supported the case for a 25 bps interest rate cut.
• The European Central Bank is expected to cut benchmark rates by 25 bps each.
• EUR/USD eases after peaking at 1.1154, bears gain confidence.

EUR/USD reversed course after extending its slide to 1.1025, finding positive mid-week position to settle near 1.1100 after peaking at 1.1154 on Friday.

The focus remained on macroeconomic data that could affect future monetary policy decisions by central banks. In the Eurozone, news revolved around growth figures, while in the US, investors kept an eye on updates on the labor market.

Warm European progress ahead of the ECB

Slow economic progress in the EU continued to limit the strength of the euro. The manufacturing sector made modest progress in August as the Hamburg Commercial Bank (HBOC) revised its manufacturing purchasing managers’ index (PMI) for the region upward, but it came in at 45.8, indicating further economic contraction. The services PMI, on the other hand, was revised down to 52.9, resulting in a composite PMI of 51.0.

In addition, the producer price index (PPI) rose more than expected in July by 0.8% this month. Compared to a year earlier, the PPI fell by 2.1%. Retail sales rose 0.1% in July, while second quarter Gross Domestic Product (GDP) was revised down to 0.2% QoQ.

The European Central Bank (ECB) will announce its monetary policy decision on Thursday, September 12, and is expected to cut its three interest rate benchmarks by 25 basis points (bps) each.

With ECB officials repeating that decisions depend on data, the move was long overdue. On the one hand, inflation continues to approach the central bank’s 2% target. On the other hand, due to the tepid economic progress due to restrictive policy, the rate cut was already set a long time ago, and what may actually affect the euro is any forward guidance that policy makers are willing to provide.

Beyond the ECB announcement, the EU will have little to offer. The Union will release Sentix Investor Confidence for September on Monday and industrial production for July on Friday, while Germany will release the final estimate of the Harmonized Index of Consumer Prices (IACP) for August on Tuesday.

US employment data ahead of the Fed

Speculative interest welcomed warm employment figures from the United States (US), which fueled speculation that the Federal Reserve (Fed) may cut interest rates by 50bps when it meets in mid-September.

The country released ADP’s Employment Changes report, which showed the private sector added 99,000 new jobs in August, well below the anticipated 145,000. At the same time, the Challenger Job Cuts report showed that layoffs in August rose to 75,891, while year-to-date hiring hit an all-time low.

More jobs data showed initial jobless claims for the week ended Aug. 30 hit 227,000, below the 230,000 expected and the previous 232,000. The number of job openings on the last business day of July was 7.67 million, according to the JOLTS Job Openings report, published by the US Bureau of Labor Statistics (BLS). The reading was well below the expected 8.1 million.

Meanwhile, the country released the August ISM manufacturing purchasing managers’ index (PMI), which improved to 47.2, below the expected 47.5. The services PMI for the same month rose more than expected as the index came in at 51.5 compared to July’s 51.4 and 51.1 expected.

Finally, on Friday, the US released the Nonfarm Payrolls (NFP) report, which showed that the US economy added 142,000 new jobs in August, less than the 160,000 expected. Even more, July’s headline reading was revised down to 89,000. The unemployment rate fell to 4.2%, as expected, while the labor force participation rate held steady at 62.7%.

The USD was between gains and losses with the NFP report as the numbers were weak enough to support a Fed rate cut, but not weak enough to trigger recession worries. A cut of 25 basis points is the most likely scenario as US policymakers enter a period of gridlock ahead of the monetary policy announcement, scheduled for September 18.

The central bank is also expected to continue allowing up to $25 billion in Treasuries and $35 billion in agency mortgage-backed securities (MBS) to mature and write off its balance sheet per month. The balance sheet fell from a record $8.9 trillion in May 2022 to about $7.1 trillion in September, though it is still above pre-pandemic levels. Finally, the Fed will update its economic projections with a fresh look at where it expects growth, inflation and employment to be over the next two years.

The US will release its consumer price index (CPI) for August next Wednesday, while the producer price index (PPI) for the same month will come out the following day. At the end of the week, the country will release the preliminary estimate of the Michigan consumer sentiment index for September.

EUR/USD Technical Outlook

The weekly chart of the EUR/USD pair shows modest gains, but it also made a lower low and high, which is usually a sign of weakness ahead. At the same time, the pair is struggling to hold above a slightly bearish 200 simple moving average (SMA), while the 20 and 100 SMAs maintain bullish slopes well below the current level. Finally, technical indicators remain above the midline, picking marginally higher, limiting bearish potential but not suggesting a future advance.

However, the daily chart shows that the risk of another EUR/USD leg to the south has increased. Friday’s decline has put the technical indicators in bearish mode as they are heading sharply lower within neutral levels. At the same time, the pair is putting pressure on an optimistic 20 SMA. A break below the indicator should signal that sellers are willing to add. Finally, the 100 SMA crosses over the 200 SMA with a modest upward slope, both converging around 1.0860.

The 1.1040 level provides immediate support ahead of 1.0990. Once below the latter, interim support could be found at 1.0950 before the 1.0900 price zone. Resistance can be found at 1.1145, with a clear advance above the latter exposing the 1.1200 threshold.