EUR/USD remains fragile as US inflation looms

• EUR/USD faces selling pressure as US dollar holds on to gains ahead of September US CPI data.
• Fed officials are very concerned about the resumption of job growth.
• The Euro is under pressure as the ECB is expected to further cut interest rates by 50 bps by the end of the year.

EUR/USD is underperforming in the European session on Thursday after falling below the key 1.0950 support on Wednesday. The major currency pair remains under pressure as the US dollar (USD) clings to gains ahead of United States (US) September consumer price index (CPI) data due at 12:30 GMT.

The US Dollar Index (DXY), which tracks the value of the greenback against six major currencies, is trading near a new seven-week high near 103.00.

Economists expect the annual core CPI – which excludes volatile food and energy prices – to have risen steadily by 3.2%. The annual CPI is expected to fall to 2.3% from 2.5% in August. The monthly figure and core CPI are expected to have risen at a slower pace of 0.1% and 0.2% respectively.

The impact of the inflation data on market expectations for the Federal Reserve’s (Fed) interest rate outlook is expected to be moderate, as recent comments from Fed officials indicated they are confident that price pressures remain on track to sustainably return to target the bank of 2%. Fed policymakers are very focused on reviving labor demand, which is why they voted unanimously for a larger-than-usual interest rate cut of 50 basis points (bps) at their policy meeting in September.

However, the scenario of a burst in inflation figures could renew risks that inflation will remain persistent and negatively impact market expectations for two more interest rates in the remaining year.

Daily market reasons: EUR/USD weakens as ECB rate cut bets increase

• EUR/USD remains vulnerable near a new eight-week low of 1.0940 due to several headwinds. Apart from the firm US dollar, the underperformance of the euro (EUR) against its major peers on the back of the European Central Bank’s (ECB) escalating dovish bets also kept the currency pair divided.
• Most ECB officials argued in favor of further interest rate cuts as risks of inflation remaining persistent in the eurozone eased significantly after September’s annual flash annual report on the Harmonized Index of Consumer Prices (HICP) decelerated to 1 .8%, the lowest since April 2021. Also, rising risks to economic growth have traders pricing in a 25 basis point rate cut in each of the other two meetings this year.
• Germany’s economy ministry said on Wednesday that it expects the economy to end the year with a 0.2 percent drop in total output. The economy ministry had previously projected growth of 0.3 percent, but had to revise the forecast due to structural and geopolitical issues. As the largest nation in the eurozone, the impact of a reduction in German economic growth would be large for the euro.
• On the economic front, annual German retail sales, a key measure of consumer spending that stokes inflationary pressures, expanded at a robust 2.1 percent pace in August after contracting 1.6 percent in July. On a month-over-month basis, the measure of consumer spending rose at a faster pace of 1.6 percent from 1.5 percent in July.

Technical Analysis: EUR/USD is trading near a new eight-week low below 1.0940

EUR/USD extends decline to near 1.0935 after failing to hold key 1.0950 support. The major currency pair weakened after providing a breakdown of the Double Top chart pattern on a daily time frame. The aforementioned chart pattern was triggered after the common currency pair broke below the September 11 low of 1.1000.

The 14-day Relative Strength Index (RSI) is settling in the bearish range of 20.00-40.00, suggesting more weakness ahead.

Looking to the downside, the pair is expected to find support near the 200-day EMA around 1.0900. On the upside, the September 11 low of 1.1000 and the 20-day EMA at 1.1090 will be major resistance areas.