EUR/USD outlook: Attention turns to US data and FOMC

This morning’s release of stronger-than-expected Eurozone CPI has made a September rate cut from the ECB a close call, helping to ease the pressure on the single currency. The euro gained ground against most majors except the yen with the latter surging on the back of the Bank of Japan’s surprise 15 basis point rate hike overnight. Attention is now turning to the US side of things as we approach the second half the session with a couple of second-tier economic data to come before the FOMC’s policy decision at 19:00 BST. The potential for a dovish surprise could cement our moderately bullish EUR/USD outlook. The greenback could start to head lower more meaningfully as we head deeper into Q3, now that July is coming to an end with the Dollar Index holding a small loss for the month, largely thanks to a rebounding yen. But it could fall against the likes of the euro and pound amid declining US bond yields and increasing expectations of rate cuts by the Federal Reserve.

 

Key events for EUR/USD this week: FOMC and NFP

 

While this morning’s slightly stronger inflation data from the Eurozone has helped to provide a bit of a lift, the EUR/USD outlook for the remainder of the week and potentially beyond could be determined by the US dollar side of the equation, starting with the FOMC rate announcement today the July jobs report on Friday.

 

FOMC unlikely to announce rate cut

 

At the conclusion of today’s FOMC meeting, the Fed is likely to keep policy unchanged with the market implied probability of a hold being in the high 90s, almost 100%. But the probability of a cut in September is now 100% priced in, meaning any further dollar weakening is likely to be determined by how dovish or otherwise the Fed is going to be about future policy decisions.

 

We anticipate that the Fed will adopt a more dovish tone today. Recent statements from Fed officials and weak US economic data, including an unemployment rate that has risen to 4.1% and a drop in CPI inflation to 3.0% annual rate, suggest that the current monetary policy may be too restrictive. With a global trend towards policy easing (excluding Japan), the Fed may aim to avoid causing unnecessary economic strain.

 

Beyond September, market expectations point to around 65-70 basis points of cuts by the end of the year. If the Fed or its Chairman Jerome Powell confirms a dovish approach at today’s FOMC meetings, predictions might increase to as many as three cuts before year-end, which could weaken the dollar and bolster the EUR/USD pair.

 

US employment indicators could determine pace of 2024 cuts

 

The Federal Reserve's dual mandate to achieve maximum employment and keep prices stable, means it is not all about inflation, especially with CPI slowly easing towards the central bank’s 2% goal. The recent uptick in the unemployment rate confirms the softness in labour market data of late. This puts the focus on the upcoming US non-farm jobs report on Friday. Economists predict around 177,000 net NFP job gains for July with the unemployment rate seen steady at 4.1%. However, should the unemployment rate rises further and/or the headline jobs growth slow further then that could reinforce expectations of 3 rate cuts by the Fed’s December meeting. This scenario may further weaken the dollar, providing support for the EUR/USD. However, a stronger set of US employment data could see the EUR/USD remain under pressure.

 

 

Eurozone CPI comes in hotter

 

Turning our attention back to Europe, this morning’s release of the latest inflation figures from the eurozone revealed a slight uptick in prices. The year-on-year increase in the Harmonized Index of Consumer Prices (HICP), climbed to 2.6% in July from 2.5% in June, just above the consensus forecast of 2.5%. Core inflation, which strips out volatile items like energy and food, held steady at 2.9%, also exceeding expectations.

 

Energy inflation nudged up to 1.3%, but the real focus for the ECB is on services inflation. This component is crucial because it’s the most reflective of domestic economic conditions and particularly sensitive to wage changes. While services inflation did dip slightly to 4.0% from 4.1% in June, it's still high and likely keeping ECB policymakers on their toes.

 

Even if inflation in Europe starts to come down faster in the months ahead, it remains to be seen how much of a negative impact that will have on the euro. That’s because much of the downside risks stemming from declining confidence indicators and weak economic data from eurozone has already been factored in. Economic data will need to deteriorate sharply for the euro to weaken meaningfully. The current data surprises are neither here nor there. Further evidence of an economic slowdown was evidenced this morning by the German jobs market data showing an unexpected 18,000 increase in the number of unemployed Germans in June, while German import prices unexpectedly increased by 0.4% month-on-month, increasing the upside risks to inflation.

 

 

EUR/USD outlook: Economic data for this week

 

Here's a complete list of upcoming economic data releases this week relevant specifically to the EUR/USD pair:

 

 

EUR/USD technical analysis

Source: TradingView.com

 

The technical EUR/USD outlook and the trend is slightly tilted to the bullish side, thanks largely to the recent decline in US bonds yields and rising expectations of rate cuts by the Fed. A dovish stance from the Fed today, along with the potential for US job data to weaken, could drive the EUR/USD higher, breaking more resistance levels.

 

The 1.0800 to 1.0830 range where the EUR/USD has spent the last couple of days around marks a key support zone. As of now, the EUR/USD was still hovering around this zone. This area is significant because it's where the tops of two broken trend lines, dating back to December and July 2023, intersect. Additionally, the 200-day moving average sits right in the middle of this range.

 

If the EUR/USD can't hold steady within this 1.0800-1.0830 zone, we could see a deeper correction, potentially dipping into the low 1.07s. However, should the bullish momentum return as anticipated, the pair might initially target the 1.0900 resistance level, with 1.0950 as the next potential stop.

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R