EUR/USD Retreats to 1.1705 as US Dollar Rebounds Despite Fed Rate Cut Expectations

• The Euro pulls back from 1.1779 peak as Dollar recovery outweighs soft US employment data.
• BLS downgrades payroll figures by -911K through March 2025, strengthening case for a 25 bps September reduction.
• Attention turns to upcoming PPI, CPI and Initial Jobless Claims reports, while French political reshuffling adds to Eurozone uncertainty.

EUR/USD declined by over 0.48% on Tuesday, despite US data seemingly supporting the possibility of a Federal Reserve (Fed) interest rate cut at next week's meeting. Nevertheless, the Greenback has staged a comeback, presenting a headwind for the pair, which now trades at 1.1705 after reaching a session high of 1.1779.

Euro Declines Following US Payroll Revision, Traders Anticipate Key Inflation Reports

The US Bureau of Labor Statistics (BLS) released data indicating cracks in the labor market, with payrolls revised downward through March 2025 by -911,000 or -0.6%. This report has bolstered the argument for at least a 25-basis-point rate reduction by the Fed, barring unexpectedly high inflation readings that may emerge later this week.

August's Producer Price Index (PPI) and Consumer Price Index (CPI) figures are scheduled for release on Wednesday and Thursday, respectively. Additionally, forthcoming labor market data in the form of Initial Jobless Claims could influence Fed officials' decision-making on September 16-17.

In Europe, the economic calendar remains bare as traders await the European Central Bank's (ECB) monetary policy announcement. However, political uncertainty in France persists, despite President Emmanuel Macron's appointment of Sebastien Lecornu as the new Prime Minister (PM).

Market Drivers: EUR/USD Weakens as Dollar Gains Ground

• Midweek focus shifts to US inflation data, with PPI due Wednesday and CPI Thursday. August headline PPI is projected to remain steady at 3.3% YoY, while Core PPI is expected to ease to 3.5% from 3.7%.
• CPI for the same period is forecast to rise to 2.9% YoY from 2.7%, with Core CPI, excluding food and energy, anticipated to hold at 3.1%.
• The Nonfarm Payrolls revision and August employment report have increased expectations for a Fed rate cut. Market probability tools indicate a 90% likelihood of a 25 basis point (bps) easing and a 10% chance of a 50-bps reduction. The ECB is expected to maintain rates, with a 93% probability of no change and only a 6% chance of a 25-bps cut.
• Fitch anticipates two 25-bps rate cuts in September and December, with three additional reductions projected for 2026. In contrast, the ratings agency does not foresee any rate cuts by the ECB.

Technical Analysis: EUR/USD Maintains Bullish Trend Despite 1.1700 Retreat

EUR/USD formed a bearish engulfing candle pattern, suggesting waning buyer momentum and increased seller activity ahead of the ECB meeting. The Relative Strength Index (RSI) remains in bullish territory but appears poised for consolidation.

Should EUR/USD break below 1.1700, a move towards the 20-day Simple Moving Average (SMA) at 1.1672 becomes likely. Further weakness could target the 50-day SMA at 1.1659, followed by the 100-day SMA at 1.1535.

Conversely, if the pair surpasses the July 24 high of 1.1788, it could pave the way for advances towards 1.1800 and 1.1829.

Euro Frequently Asked Questions

What is the Euro?

The Euro serves as the official currency for 19 European Union nations within the Eurozone. It ranks as the second most traded currency globally, behind the US Dollar. In 2022, it accounted for 31% of all forex transactions, with an average daily turnover exceeding $2.2 trillion. EUR/USD stands as the most actively traded currency pair worldwide, representing an estimated 30% of all transactions, followed by EUR/JPY (4%), EUR/GBP (3%), and EUR/AUD (2%).

What is the ECB and how does it impact the Euro?

The European Central Bank (ECB), headquartered in Frankfurt, Germany, functions as the Eurozone's central bank. The ECB sets interest rates and manages monetary policy. Its primary mandate involves maintaining price stability, which entails either controlling inflation or stimulating growth. The ECB's main tool is adjusting interest rates. Generally, higher interest rates or expectations thereof tend to benefit the Euro, and vice versa. The ECB Governing Council makes monetary policy decisions at eight annual meetings. These decisions are made by Eurozone national bank heads and six permanent members, including ECB President Christine Lagarde.

How does inflation data impact the value of the Euro?

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), serves as a crucial economic indicator for the Euro. If inflation rises more than anticipated, particularly above the ECB's 2% target, it may compel the ECB to raise interest rates to regain control. Comparatively high interest rates relative to other currencies typically benefit the Euro, as they enhance the region's appeal for global investors seeking returns on their capital.

How does economic data influence the value of the Euro?

Economic data releases gauge the Eurozone's health and can impact the Euro's value. Indicators such as GDP, Manufacturing and Services PMIs, employment figures, and consumer sentiment surveys can all influence the single currency's direction. A robust economy generally supports the Euro. It not only attracts more foreign investment but may also encourage the ECB to increase interest rates, directly strengthening the Euro. Conversely, weak economic data tends to weaken the Euro. Economic indicators for the four largest Eurozone economies (Germany, France, Italy, and Spain) hold particular significance, as they collectively account for 75% of the Eurozone's economic output.

How does the Trade Balance impact the Euro?

The Trade Balance represents another significant data point for the Euro. This indicator measures the difference between a country's export earnings and import expenditures over a specified period. Countries producing highly sought-after exports may see their currency appreciate due to increased demand from foreign buyers seeking these goods. Consequently, a positive net Trade Balance tends to strengthen a currency, while a negative balance typically has the opposite effect.