Market Data 
- EUR/USD remains below 1.1050 as investors turn cautious ahead of the US inflation for August and the ECB policy announcement.
- The ECB is expected to cut its key borrowing rates by 25 basis points (bps).
- US inflation data will influence market speculation for the Fed’s potential interest rate cut size.
EUR/USD struggles to gain ground near its weekly low of 1.1030 in Tuesday’s New York session. The major currency pair remains under pressure as investors turn cautious ahead of the United States (US) Consumer Price Index (CPI) data for August, which will be published on Wednesday.
Investors will keenly focus on the US consumer inflation data as it is just a week before the Federal Reserve’s (Fed) monetary policy meeting. The inflation data will provide fresh cues about whether the Fed will start its policy-easing process gradually or aggressively. The importance of the inflation data in getting more insights about the magnitude of the Fed interest rate cut has increased significantly as the US Nonfarm Payrolls (NFP) data for August failed to make a clear case for the Fed’s likely interest rate cut size.
Earlier, market participants remained worried that the Fed could opt for a large interest rate cut in September due to a sharp slowdown in the US job growth, indicated by the US NFP report for July, which prompted fears for the economy entering a recession. However, Friday’s NFP report showed that the labor market health is not as bad as it appeared last month.
Economists expect the annual headline CPI to have grown at a slower pace of 2.6%, the lowest since March 2021, from July’s reading of 2.9%. The core inflation – which excludes volatile food and energy prices – is expected to have risen steadily by 3.2%. Both monthly headline and core inflation are projected to have increased by 0.2%.
Later this week, investors will focus on the US Producer Price Index (PPI) data for August, which will be published on Thursday.
Daily digest market movers: EUR/USD falls on firm ECB interest rate cut bets
- EUR/USD trades cautiously as the Euro (EUR) exhibits a subdued performance on Tuesday, with investors focusing on the European Central Bank’s interest rate policy, which will be announced on Thursday. The ECB is widely anticipated to cut interest rates by 25 basis points (bps) on Thursday. This will be the second interest rate cut decision by the ECB in its current policy-easing cycle, which the bank started in June but left borrowing rates unchanged in July.
- Though investors seem confident about the ECB resuming its policy-easing process, market participants will majorly focus on the monetary policy statement and ECB President Christine Lagarde’s press conference to get cues about the likely policy action for the remainder of the year.
- Lagarde is expected to deliver a dovish interest rate guidance as the annual Harmonized Index of Consumer Prices (HICP) of the Eurozone’s largest nation, Germany, has returned to the bank’s target of 2% in August. Also, German economic growth is vulnerable due to the poor demand environment. The scenario of declining inflation and worsening economic conditions paves the way for an expansionary monetary policy stance.
- Currently, financial market participants expect that the ECB will cut interest rates one more time in the last quarter of this year.
Technical Analysis: EUR/USD declines toward 1.1000
EUR/USD stays below 1.1050 in Tuesday’s North American trading hours. The major currency pair has come under pressure after failing to sustain above the crucial resistance of 1.1100. The near-term outlook of the shared currency pair is uncertain as it continues to trade below the 20-day Exponential Moving Average (EMA), which trades around 1.1060.
The 14-day Relative Strength Index (RSI) falls further to 50.00, suggesting a lack of momentum and a sideways trend.
The pair is expected to find support near the psychological level of 1.1000. On the upside, last week’s high of 1.1155 and the round-level resistance of 1.1200 will act as major barricades for the Euro bulls.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
