EUR/USD nears multi-month low, defends 1.1000 level ahead of ECB meeting

• EUR/USD is holding steady above the 1.1000 mark as traders eagerly await the ECB’s policy decision.
• Reduced bets on more aggressive Fed easing are supporting the USD and capping the major’s gains.
• Traders appear reluctant to key event risk from the central bank and US PPI release.

The EUR/USD pair is struggling to gain any significant traction during the Asian session on Thursday and is trading in a narrow band, just above the psychological 1.1000 level, or a four-week low hit the previous day. Traders appear reluctant and are choosing to wait for the highly anticipated European Central Bank (ECB) policy meeting before positioning themselves for the next step of a directional move.

The ECB is expected to cut interest rates by 25 basis points (bps) amid signs of cooling inflation in the eurozone. Bets were reaffirmed by data showing that Germany’s consumer price index (CP) fell to a three-year low in August and hit the ECB’s 2% target. This in turn undermines the common currency and acts as a headwind for the EUR/USD pair amid modest US dollar (USD) strength.

The US CPI report released on Wednesday indicated that US consumer prices are falling across the board. Still, core CPI suggested core inflation remains sticky and dashed hopes for a bigger rate cut by the Federal Reserve (Fed) next week. That’s bolstered by a rise in U.S. Treasury yields and lifted the USD index (DXY), which tracks the greenback against a basket of currencies, closer to a monthly peak.

That said, markets have fully priced in the prospects for an imminent start to the Fed’s policy easing cycle and a 25bps rate cut at the end of the September 17-18 FOMC meeting. This, along with the bullish mood of the market, limits any further appreciation movement for the safe-haven greenback. This should continue to provide some support to EUR/USD heading into the key risk of a central bank event and warrant caution for bear traders.

Investors may also prefer to wait for the ECB’s updated economic forecasts, which, along with ECB Christine Lagarde’s comments, will weigh on the euro. Apart from this, the release of the US Producer Price Index (PPI) could provide fresh impetus to the EUR/USD pair and produce some significant trading opportunities later in the North American session.