EUR/USD Remains Fragile as Traders Await US Inflation Data

The EUR/USD currency pair continues to exhibit weakness as traders brace for the release of the US Consumer Price Index (CPI) data for September. The pair, which recently broke below key support at 1.0950, faces additional selling pressure due to a combination of US dollar strength and expectations of further monetary policy easing by the European Central Bank (ECB). This analysis delves into the key market drivers affecting EUR/USD, including the latest developments from both the United States and Europe.

US Dollar Strength Ahead of CPI Data

The US Dollar (USD) has maintained its upward momentum ahead of the much-anticipated CPI data, which is scheduled for release at 12:30 GMT. The US Dollar Index (DXY), which measures the greenback’s performance against a basket of six major currencies, is trading close to a fresh seven-week high near 103.00.

Inflation Expectations for September

Economists predict that the annual core CPI—which excludes volatile food and energy prices—will have grown at a steady pace of 3.2%. Meanwhile, annual headline CPI is expected to decelerate to 2.3%, down from 2.5% in August. For the month-on-month figures, both headline and core CPI are forecasted to have risen modestly by 0.1% and 0.2%, respectively.

Impact on Federal Reserve Interest Rate Outlook

Despite the upcoming inflation data, the impact on the Federal Reserve (Fed)’s interest rate outlook is expected to be moderate. Recent commentary from Fed officials suggests confidence in inflation trends, with expectations that price pressures are on track to return to the 2% target. However, Fed policymakers are also highly focused on labor market dynamics, as evidenced by their decision to vote unanimously for a 50 basis points (bps) rate cut in the September policy meeting to stimulate job growth.

However, if inflation figures unexpectedly exceed forecasts, there could be renewed concerns about inflationary pressures persisting, which may influence market expectations for future interest rate hikes by the Fed.

GBP/USD Daily Price Chart

Source: TradingView, prepared by Richard Miles

ECB Dovish Sentiment Weighs on the Euro

EUR/USD Faces Selling Pressure Amid ECB Rate Cut Expectations

The Euro is underperforming against its major peers, with a majority of ECB officials signaling the potential for further rate cuts by year-end. The ECB is expected to reduce interest rates by 50 bps, with the market pricing in a 25-bps cut at each of the remaining policy meetings this year. This dovish sentiment has placed significant pressure on EUR/USD, contributing to its decline toward 1.0930 in Thursday’s European session.

Inflation Eases in the Eurozone

The ECB’s stance on rate cuts has been bolstered by recent data showing easing inflationary pressures in the Eurozone. The September flash Harmonized Index of Consumer Prices (HICP) decelerated to 1.8%—its lowest level since April 2021. This marked slowdown in inflation has reassured policymakers that risks of sustained price pressures are diminishing, paving the way for further monetary easing.

German Economic Struggles

Adding to the Euro’s woes are growing concerns about the economic outlook for Germany, the Eurozone’s largest economy. On Wednesday, the German Economic Ministry revised its growth forecast for 2023, now predicting a 0.2% decline in overall output. This contrasts with earlier projections of 0.3% growth, with the downward revision attributed to structural issues and ongoing geopolitical tensions. A contraction in Germany’s economy would have a significant negative impact on the Eurozone as a whole, further weakening the Euro.

German Retail Sales Show Mixed Results

While the broader economic outlook is grim, some positive data emerged from Germany’s Retail Sales report. Annual retail sales, a key measure of consumer spending that contributes to inflationary pressures, expanded by 2.1% in August, recovering from a 1.6% contraction in July. On a month-on-month basis, retail sales grew by 1.6%, slightly faster than the 1.5% increase seen in July. However, these figures are unlikely to offset the overall negative sentiment surrounding the Euro.

Technical Analysis: EUR/USD Under Pressure

Breakdown of Key Support Levels

EUR/USD extended its decline toward 1.0930 after breaking below the crucial support level of 1.0950 on Wednesday. The currency pair also delivered a breakdown of a Double Top chart pattern on the daily timeframe, which had formed after failing to hold the September 11 low of 1.1000. This technical breakdown suggests further weakness ahead.

Relative Strength Index (RSI) Indicates Bearish Momentum

The 14-day Relative Strength Index (RSI) currently sits in the bearish range of 20.00-40.00, indicating that bearish momentum is likely to persist. With RSI levels this low, the pair could experience additional downside pressure in the near term.

Key Support and Resistance Levels

On the downside, the next key support level to watch is near the 200-day Exponential Moving Average (EMA) at 1.0900. A break below this level could signal further declines. On the upside, the pair will face major resistance at the September 11 low of 1.1000, followed by the 20-day EMA at 1.1090.

Daily Digest: Key Market Movers for EUR/USD

• US Dollar Strength: The USD remains strong, driven by expectations for the September CPI data, which could confirm the Fed’s confidence in inflation returning to its 2% target.
• ECB Dovish Sentiment: Expectations of further ECB rate cuts are weighing heavily on the Euro, with a 50-bps reduction expected by year-end.
• German Economic Woes: Germany’s downward revision of its growth forecast and concerns over structural problems are adding to the Euro’s underperformance.
• German Retail Sales: Retail sales data for August showed a rebound in consumer spending, but this is unlikely to offset broader economic concerns.
• Technical Weakness: EUR/USD is facing strong technical resistance after breaking below 1.0950, with the RSI indicating more downside potential.

EUR/USD Vulnerable Ahead of Key Data Releases

The EUR/USD remains fragile ahead of the US CPI data for September. While inflation expectations are moderate, any surprise uptick in the data could push the USD higher, putting more pressure on the Euro. Meanwhile, the ECB’s dovish stance and concerns over Germany’s economic outlook are weighing heavily on the Euro, keeping the currency pair under significant selling pressure. Technically, the break below 1.0950 and the Double Top formation signal further downside potential, with the next major support level at 1.0900.

With key data releases on the horizon and both the Fed and ECB taking center stage, the outlook for EUR/USD remains uncertain. Traders should closely monitor developments in both inflation and central bank policy for clues on the pair’s next moves.