The foreign exchange market saw the EUR/USD pair climb during the North American session, fueled by a combination of weaker-than-expected Consumer Price Index (CPI) data from the United States and rising jobless claims that reached their highest level in nearly four years. The recent developments contributed to a softened stance of the U.S. dollar, offsetting the steady monetary policy stance from the European Central Bank (ECB), which recently confirmed a data-dependent and meeting-by-meeting approach to future interest rate decisions.
At present, the EUR/USD pair is trading at 1.1733, reflecting a gain of 0.34%. The leap in value occurred after the ECB opted to hold its Deposit Rate steady at 2%. Further commenting on the current economic environment, ECB President Christine Lagarde highlighted a consensus within the Governing Council that monetary policy is positioned well, indicating that adjustments would be made as needed without being tethered to a predetermined course.
The latest inflation metrics from the U.S. showed year-over-year CPI rising to 2.9% in August, up from 2.7%, aligning with market expectations. The core CPI, which strips out volatile food and energy prices, remained constant at 3.1%, unchanged from the previous month’s figures. Following these figures, the market’s reaction was somewhat muted, with sentiment toward the Federal Reserve easing policy remaining largely intact.
In a separate report, Initial Jobless Claims surged to 267,000 for the week ending September 6, compared to the anticipated 235,000. This figure not only exceeded consensus expectations but also marks a notable rise from the previous week’s revised figure of 237,000, indicating a worrying trend in the labor market.
The ECB’s latest policy decision underscores the bank’s flexible approach to managing interest rates. Lagarde remarked that the disinflationary process appears to have concluded and alluded to decreased trade uncertainties. However, she cautioned that economic growth risks still lean towards the downside.
As a result of these developments, the U.S. Dollar Index (DXY), which gauges the dollar against a basket of major currencies, fell by 0.28%, settling at 97.53. Meanwhile, Fitch Ratings provided forecasts suggesting two 25-basis-point rate cuts from the Federal Reserve, expected in September and December, with further reductions anticipated through 2026. Conversely, Fitch does not foresee any impending rate cuts from the ECB.
Market expectations have shifted following this data release, with traders pricing in a 90% likelihood of a 25-basis-point cut from the Fed, alongside a slim 10% chance for a more aggressive 50-basis-point reduction. In contrast, the ECB is projected to maintain its current rates, with a 93% probability for no changes and a mere 7% chance for a cut.
From a technical perspective, the EUR/USD pair is showing strong bullish momentum, highlighted by the formation of a ‘bullish engulfing’ chart pattern. This two-candlestick formation is indicative of a potential further upside, with the Relative Strength Index (RSI) improving, even after a slight retreat. If the EUR/USD manages to breach the 1.1750 mark, traders will be eyeing key resistance levels at 1.1800 and the year’s peak at 1.1829. Conversely, should the pair fall below 1.1700, immediate support can be anticipated at the 20-day and 50-day Simple Moving Averages at 1.1677 and 1.1658, respectively.
In terms of broader economic implications, the performance of the euro is closely tied to the monetary policy put forth by the ECB, which aims to maintain price stability, impacting inflation rates and economic growth in the Eurozone. Any deviations in critical economic indicators such as GDP, PMIs, and consumer sentiment can significantly influence the euro’s valuation against the dollar. Thus, market participants remain vigilant as they navigate the fluctuating landscape of currency trading.
