Ladies and gentlemen, here comes the Federal Reserve

• The US Federal Reserve is set to cut interest rates for the first time in over four years.
• The European Central Bank cut interest rates but maintained its cautious approach this week.
• EUR/USD is struggling to break above 1.1100 with a slightly bullish stance.

EUR/USD clawed back early losses and finished just below the 1.1100 level, little changed for the week. The pair dipped to 1.1001 mid-week as the US dollar (USD) benefited from a risk-adverse environment. It finally gave up early gains on Thursday following the European Central Bank’s (ECB) monetary policy announcement and United States (US) inflation numbers.

ECB offers cuts but remains cautious

The ECB cut the deposit facility rate by 25 basis points (bps) to 3.5%, in line with expectations, but at the same time cut 60 basis points from the marginal lending facility rate and the main refinancing operations. Despite not being mentioned directly, sluggish economic growth in the Eurozone was among the main reasons behind the decision.

ECB President Christine Lagarde somewhat acknowledged the bleak scenario, noting that the recovery continues to face some headwinds, while policymakers also see rising risks to inflation. As a result, officials said they would keep policy rates tight enough for as long as necessary to achieve such a goal. Finally, Lagarde reiterated that the central bank will continue to take decisions on a meeting-by-meeting basis and that their decisions will be data-dependent.

The ECB announcement was broadly in line with market expectations, with limited impact on the euro (EUR). EUR/USD advanced on disappointing US data.

US inflation disappoints

The US published the Consumer Price Index (CPI) on Wednesday. The US Bureau of Labor Statistics reported that the annual CPI rose 2.5% year-on-year (YoY) in August, down from 2.9% previously. The annual core figure also matched July’s and print expectations at 3.2%. However, core monthly growth was stronger than anticipated at 0.3%.

On Thursday, the country released its Producer Price Index (PPI) for the same month, which rose 1.7 percent from a year earlier, below the 1.8 percent expected and below the previous 2.1 percent. On a monthly basis, the PPI rose 0.2%, slightly above the 0.1% expected.

The figures dashed hopes for a 50 basis point (bps) interest rate cut from the Federal Reserve (Fed) at its meeting next week. The Fed will likely offer a modest 25 bps cut, which, by the way, was a long time ago.

The path of the Federal Reserve takes a turn

The US central bank is expected not only to cut interest rates, but also to release a new Summary of Economic Projections (SEP) or dot chart. The paper anticipates policymakers’ views on where growth, inflation and employment are projected to be in the coming years and their intentions for rate changes. The previous SEP was released in June and showed that policymakers plan to cut rates by just 25 bps this year. Revising such a figure could be a game changer. The higher the intended level of cuts, the more likely the US dollar will suffer.

If the Fed surprises by 50 bps in its September meeting, the USD also risks a steep pullback.

The reason behind a wider reduction is economic progress. Despite the fact that the US economy is in much better shape than that of its main rivals, there are still lingering concerns about a soft landing. Recession, at this point, might be too much of a word to use.

However, and despite inflation still above the Fed’s 2% target, the economy has struggled long enough to continue in such a state. It’s time for the US to reclaim its crown.

What else is on the file?

In the coming days, the Fed won’t be the only central bank to take the stage. The Bank of England (BoE) and Bank of Japan (BoJ) will also announce monetary policy decisions on Thursday and Friday respectively that could affect the USD through market sentiment.

The US will publish August retail sales ahead of the Federal Open Market Committee (FOMC) announcement, while the Eurozone will publish the final estimate of August’s Harmonized Index of Consumer Prices (IACP) and September’s consumer confidence. As for Germany, the country will release September’s ZEW Economic Sentiment Survey and August’s Producer Price Index (PPI).

EUR/USD Technical Outlook

Technically speaking, the risk for EUR/USD is tilted to the upside. On the weekly chart, the pair briefly dipped below a 200 simple moving average (SMA) but held above it for the fourth consecutive week. At the same time, the 20 and 100 SMAs continue to head north below the longest, supporting the bullish case. Technical indicators, meanwhile, are advancing only modestly within positive levels, with limited directional strength.

The daily chart for EUR/USD shows that the pair is struggling to extend gains beyond a still bullish SMA of 100. Meanwhile, a slightly bullish SMA of 100 is advancing above a flat 200 SMA around the 1.0890 level. Overall, the moving averages suggest that buyers hold the reins. Technical indicators, however, reflect limited bullish conviction. The Momentum indicator ticked higher but remains below its 100 line, while the Relative Strength Index (RSI) indicator is consolidating around 55.

EUR/USD needs to break above 1.1140 to regain its bullish balance, then look to test the 1.1200 threshold. The bullish case will strengthen if the pair settles above the latter. Below the 1.1000 level, on the other hand, the pair could experience a major pullback, with not much in the way until the 1.0900 region.