EUR/USD Holds Steady Around 1.1700 as Muted US Producer Prices Fuel Rate Cut Speculation

The EUR/USD pair remains relatively stable near the 1.1700 level on Wednesday as market participants digest recent economic data. The US Dollar’s weakness, triggered by softer inflation figures and growing expectations for the Federal Reserve’s (Fed) first rate cut, keeps the pair trading within familiar territory.

Euro Maintains Ground as Subdued US PPI Weighs on Greenback

August’s US Producer Price Index (PPI) came in lower than anticipated for both headline and core readings. However, the market response was not as dovish as expected, with traders awaiting Thursday’s Consumer Price Index (CPI) release and Initial Jobless Claims for the week ending September 6.

On the European front, while the economic calendar was bare, EUR/USD traders remain focused on the upcoming European Central Bank (ECB) monetary policy meeting outcome.

Geopolitical tensions rose after reports of unauthorized aerial vehicles breaching Polish airspace, triggering a risk-off reaction that briefly pushed the pair into negative territory.

Meanwhile, a prominent US political figure has urged the European Union (EU) to impose significant tariffs on certain Asian nations in an attempt to pressure Russia regarding the ongoing conflict in Ukraine.

Key Market Movers: EUR/USD Investors Await US Inflation Data

• US PPI growth decelerated in August, easing to 2.6% YoY from 3.3%. Core PPI also moderated, registering 2.8% YoY compared to July’s downwardly revised 3.5%. Following the release, Fed rate cut expectations shifted slightly more dovish.

• The US Dollar Index (DXY), which measures the Greenback against a basket of major currencies, is up 0.10% at 97.85.

• August’s US CPI is projected to increase to 2.9% YoY from 2.7%, while Core CPI, excluding food and energy, is anticipated to remain steady at 3.1%.

• A prominent ratings agency forecasts two 25-basis-point rate cuts in September and December, with three additional reductions expected in 2026. In contrast, the agency does not project further rate cuts by the ECB.

• Post-data, market participants had priced in a 90% probability of the Fed easing policy by 25 bps and a 10% chance of a 50 bps cut, according to a leading market interest rate probability tool. The ECB is likely to maintain current rates, with a 93% probability of no change and only a 7% chance of a 25 bps reduction.

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

The EUR/USD has experienced two consecutive bearish sessions, pushing the pair below the 1.1700 mark. However, strong support lies around the confluence of the 20-day and 50-day Simple Moving Averages (SMAs) at 1.1672 and 1.1659, respectively.

While the Relative Strength Index (RSI) remains in bullish territory, it indicates that buyers are losing momentum as the reading dropped from 60 to 52, with sellers eyeing the 50 neutral line.

Should EUR/USD climb above 1.1700, expect a move towards 1.1750, followed by the July 24 level at 1.1788. A breach above this point could expose 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, following the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover exceeding $2.2 trillion.

EUR/USD is the most actively traded currency pair worldwide, representing approximately 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 is responsible for setting interest rates and managing monetary policy.

The ECB’s primary mandate focuses on maintaining price stability, which involves either controlling inflation or stimulating growth. Its main tool is the adjustment of interest rates. Generally, higher interest rates – or the expectation thereof – tend to benefit the Euro, and vice versa.

The ECB Governing Council makes monetary policy decisions during meetings held eight times annually. These decisions are made by the heads of Eurozone national banks and six permanent members, including the ECB President.

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 expected, particularly above the ECB’s 2% target, it may compel the ECB to raise interest rates to maintain control.

Relatively high interest rates compared to other major currencies typically benefit the Euro, as they make the region more attractive to global investors seeking to allocate their capital.

How does economic data influence the value of the Euro?

Economic data releases gauge the health of the economy 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 direction of the single currency.

A robust economy generally supports the Euro. It not only attracts more foreign investment but may also encourage the ECB to consider interest rate hikes, which directly strengthens the Euro. Conversely, weak economic data tends to exert downward pressure on the currency.

Economic data from the four largest Eurozone economies (Germany, France, Italy, and Spain) are particularly significant, as they collectively account for 75% of the Eurozone’s economy.

How does the Trade Balance impact the Euro?

The Trade Balance is another important data release for the Euro. This indicator measures the difference between a country’s export earnings and import expenditures over a specific period.

If a country produces highly sought-after exports, its currency may appreciate due to increased demand from foreign buyers seeking to purchase these goods. Consequently, a positive net Trade Balance tends to strengthen a currency, while a negative balance typically has the opposite effect.