EUR/USD is experiencing a significant downturn, dropping below the key support level of 1.1100 during the European trading session. This decline comes as preliminary inflation data from Spain and six major German states indicates a continued easing of price pressures in August, leading to increased speculations of an impending interest rate cut by the European Central Bank (ECB). At the same time, the US Dollar has strengthened, with the US Dollar Index (DXY) climbing towards 101.30.
The strengthening of the US Dollar reflects a shift towards risk aversion among investors, as they await the release of the US Personal Consumption Expenditure Price Index (PCE) data for July. This inflation data is expected to influence market expectations regarding the magnitude of potential interest rate cuts by the Federal Reserve (Fed) in September.
The upcoming PCE inflation report is projected to show a 2.7% year-over-year increase in core inflation for July, surpassing the 2.6% recorded in June. Additionally, month-over-month core PCE is forecasted to have risen by 0.2%.
Investors will be closely monitoring the revised Q2 Gross Domestic Product (GDP) estimates and Initial Jobless Claims data for the week ending August 23, scheduled for release at 12:30 GMT. While the revised Q2 GDP figures are not expected to significantly impact the US Dollar, the preliminary August inflation data for Germany, set to be published at 12:00 GMT, could provide further market insights.
Of particular interest will be the Jobless Claims data, as the Fed remains attentive to potential risks to the labor market. Fed Chair Jerome Powell emphasized the central bank’s commitment to supporting labor market strength during his recent address at the Jackson Hole Symposium.
Daily Market Update: EUR/USD Weakens on ECB Rate Cut Expectations
- EUR/USD continues its decline below the critical 1.1100 support level in European trading, driven by the Euro’s underperformance against major currencies amid growing expectations of an ECB interest rate cut in September.
- A notable slowdown in price pressures in Spain and key German states has bolstered speculations of an ECB rate cut next month. Spain’s Annual Harmonized Index of Consumer Prices (HICP) registered a 2.4% reading, the lowest so far this year.
- While the Eurozone has been facing easing price pressures and a challenging economic outlook, recent data including the Eurozone Economic Sentiment Indicator, Industry Confidence, and Services Sentiment have outperformed expectations in August. However, Consumer Confidence saw a slight decline to -13.5 from the previous reading of -13.4.
- Expectations are high for an additional rate cut by the ECB later this year, with some policymakers indicating support for further monetary easing. Dutch official Klaas Knot mentioned the importance of inflation converging to 2% by 2025, suggesting a willingness to consider rate cuts in the coming months.
- The release of German and Eurozone flash HICP data for August will provide further insights into inflation trends, with German HICP expected to show a slower annual growth rate of 2.3% compared to 2.6% in July.
Technical Analysis: EUR/USD Breaks Below 1.1100
EUR/USD has experienced a sharp decline below the key level of 1.1100 after failing to sustain its upward momentum above 1.1200. Despite this downturn, the short to long-term Exponential Moving Averages (EMAs) continue to trend higher, indicating a positive outlook for the currency pair.
Previously, EUR/USD demonstrated strength by breaking above a Rising Channel formation on the daily timeframe.
The 14-day Relative Strength Index (RSI) has retreated from overbought levels above 75.00, now hovering below 60.00.
Looking ahead, potential upside targets for EUR/USD include the recent high of 1.1200 and the July 2023 peak at 1.1275, while downside support is anticipated around the psychological level of 1.1000.
Euro FAQs
Learn more about the Euro and its impact on the financial markets:
- The Euro is the currency used in the Eurozone, comprising 20 European Union countries. It is the second most traded currency globally, with significant influence on foreign exchange transactions.
- The European Central Bank (ECB) in Frankfurt, Germany, plays a crucial role in setting interest rates and managing monetary policy for the Eurozone.
- Eurozone inflation data, particularly the Harmonized Index of Consumer Prices (HICP), is a key indicator affecting the Euro’s value and monetary policy decisions.
- Economic data releases, such as GDP, PMIs, and trade balance figures, can impact the Euro’s performance in the financial markets.
Understanding these factors can help investors and traders navigate the complexities of the Euro and make informed decisions in the forex market.