- EUR/USD falls below 1.1150 as softer-than-expected inflation data from France and Spain has prompted ECB rate cut prospects in October.
- Flash French CPI (EU norm) and Spain’s HICP fell below 2% year-on-year in September.
- Investors await the US core PCE inflation data on Friday for fresh Fed interest rate guidance.
EUR/USD slumps below 1.1150 in Friday’s European session. The major currency pair faces sharp selling pressure as the Euro (EUR) declines after the flash French Consumer Price Index (CPI) (EU Norm) and the Spain Harmonized Index of Consumer Prices (HICP) data showed that price pressures grew at a slower-than-expected pace in September.
A sharp deceleration in French and Spanish inflationary pressures has prompted market expectations for the European Central Bank (ECB) to cut interest rates again in the October meeting. This would be the third interest rate cut by the ECB in its current policy-easing cycle, which started in June. The ECB reduced interest rates again in September after leaving them unchanged in July.
Annual CPI in France grew at a pace of 1.5%, sharply lower than estimates of 1.9% and the former release of 2.2%. On month, price pressures deflated at a robust pace of 1.2%, faster than expectations of 0.8%.
In Spain, the annual HICP rose by 1.7%, slower than estimates of 1.9% and from 2.4% in August. On month, the HICP declined by 0.1%, which was expected to remain flat.
Going forward, investors will focus on the preliminary German and Eurozone HICP data for September, which will be published on Monday and Tuesday, respectively.
Daily digest market movers: EUR/USD comes under pressure ahead of US core PCE inflation
- EUR/USD faces selling pressure as the US Dollar (USD) rises ahead of the United States (US) Personal Consumption Expenditures Price Index (PCE) for August, which will be published at 12:30 GMT. The inflation data will significantly influence market expectations of the Federal Reserve (Fed) interest rate outlook for the last quarter of the year. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, edges higher to near 100.65 but has remained inside the 100.20-101.40 range for the past two weeks.
- The PCE report is expected to show that core inflation rose at a faster pace of 2.7% year-on-year from 2.6% in June, with monthly figures growing steadily by 0.2%.
- Currently, financial markets seem to be confident that the Fed will cut interest rates for the second straight time in November as inflation is on track to return to the bank’s target of 2% and policymakers are concerned over growing risks to labor demand. However, traders remain equally split over the potential rate cut size between 25 and 50 bps, according to the CME FedWatch tool.
- Next week, investors will focus on Fed Chair Jerome Powell’s speech on Monday, a slew of labor market data, and the ISM Purchasing Managers’ Index (PMI) to project the next move in the US Dollar.
Technical Analysis: EUR/USD ranges below 1.1200
EUR/USD has consolidated in a 100-pip range since Tuesday as investors look for fresh Fed-ECB interest rate cues. The major currency pair remains firm as it holds the breakout of the Rising Channel chart pattern formed on a daily time frame near the psychological support of 1.1000.
The upward-sloping 20-day Exponential Moving Average (EMA) near 1.1110 suggests that the near-term trend is bullish.
The 14-day Relative Strength Index (RSI) edges lower below 60.00, suggesting momentum is weakening.
Looking up, a decisive break above the round-level resistance of 1.1200 will result in further appreciation toward the July 2023 high of 1.1276. On the downside, the psychological level of 1.1000 and the July 17 high near 1.0950 will be major support zones.
Euro FAQs
The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the 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.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
Source: https://www.fxstreet.com/news/eur-usd-slides-below-11150-as-soft-french-spain-inflation-weighs-on-euro-202409270920