- EUR/USD reaches a peak not seen in seven months as the US Dollar continues to weaken.
- The anticipated decrease in the US CPI report for July restricts the potential gains in the US Dollar.
- The Euro strengthens as market participants anticipate a more gradual reduction in interest rates by the ECB.
The EUR/USD reaches a new peak of 1.1035 during Wednesday’s trading session in New York. The primary currency pair experienced an increase as the US Dollar (USD) continued to weaken following the release of the United States (US) Consumer Price Index (CPI) report for July, which indicated that price pressures were in line with market predictions. The US Dollar Index (DXY), which monitors the value of the Greenback against six major currencies, is currently near a recent weekly low of 102.30.
The latest report on US CPI revealed that both monthly headline and core inflation, which excludes volatile food and energy items, increased by 0.2%, which is in line with expectations. The annual headline CPI increased at a more moderate rate of 2.9% compared to the estimates and June’s reading of 3%. During the same time frame, the core CPI slowed down to 3.2%, as anticipated, from the previous reading of 3.3%.
Regarding interest rate guidance, Raphael Bostic, the President of the Atlanta Federal Reserve (Fed) Bank, expressed on Tuesday that recent developments have bolstered the Fed’s confidence in the return of inflation to the desired 2% level. However, he prefers to have additional evidence before fully endorsing any interest rate cuts. A projected decrease in US inflation data would enhance policymakers’ assurance that inflation is progressing towards the targeted rate of 2%.
Nevertheless, the market’s anticipation of the Federal Reserve (Fed) implementing substantial interest rate reductions in September has diminished. At present, the CME FedWatch tool indicates that traders have factored in a high probability of a 50 basis point (bp) rate cut in September. This likelihood has decreased from the previous estimate of 54.5% following the release of the inflation report.
The US Dollar was already facing pressure due to a less-than-anticipated July US Producer Price Index (PPI) report. Headline and core PPI experienced a slight decrease both monthly and annual. It appears that producers are experiencing a decline in their ability to set prices due to weakening demand conditions.
The Euro’s Strength Supports the Firmness of EUR/USD
- EUR/USD held onto its gains above 1.1000 during Wednesday’s New York session. The main currency pair is cheerful because the Euro (EUR) outperformed other major currencies. The Euro is showing a robust performance due to the anticipation that the European Central Bank (ECB) will gradually reduce its primary lending rates.
- The ECB initiated its cycle of policy easing in June, as officials grew more optimistic about the likelihood of price pressures reaching the bank’s target of 2% by 2025. Nevertheless, policymakers persisted in avoiding a predetermined strategy for reducing interest rates due to concerns that an assertive expansionary monetary policy stance might reignite inflation.
- A recent Reuters survey conducted from August 8-13 revealed that a significant majority of participants anticipate the European Central Bank (ECB) will reduce interest rates on two separate occasions before the end of the year. Precisely, respondents predict a rate cut in September followed by another in December.
- Regarding the economy, Eurostat has published updated figures for the preliminary Q2 Gross Domestic Product (GDP) estimates. The report indicated that the Eurozone economy grew by 0.3%, which is consistent with the preliminary data and the growth rate observed in the initial quarter of this year.
EUR/USD Seems to Have Found Stability Above the 1.1000 Level
The EUR/USD reaches a brand new peak above 1.1000, marking its highest level in seven months. The primary currency pair gains momentum following a breakout of the Channel formation on a daily time frame. The 20-day Exponential Moving Average (EMA) that slopes upwards around 1.0900 indicates a positive near-term outlook for the shared currency pair.
The 14-day Relative Strength Index (RSI) surges into the 60.00-80.00 range, suggesting that the momentum has tilted towards the upside.
Fortunately, the Euro bulls will face a significant obstacle in the form of the August 10, 2023, high at 1.1065 and the round-level resistance of 1.1100.
On the other hand, if the asset falls below the low of August 1 at 1.0777, it could potentially decline further towards the low of February around 1.0700. If the latter were to break down, it would be vulnerable to reaching the June 14 low at 1.0667.