The EUR/USD pair is gaining traction, advancing for the third straight session and edging toward the 1.1800 level during Asian trading hours on Tuesday. The currency pair is supported by broad-based weakness in the US Dollar (USD), as markets increasingly expect the Federal Reserve (Fed) to embark on rate cuts in September.
Political instability in France and expectations of a steady stance from the European Central Bank (ECB) add to the complex backdrop shaping price action. Nabotex Group’s expert Ben Stevens delivers a detailed analysis of the subject in this article.
Dollar Weakness Fuels EUR/USD Upside
The US Dollar Index (DXY) has struggled to find demand following last week’s softer-than-expected US Nonfarm Payrolls (NFP) data for August. The weak jobs report has reinforced the view that the Fed is on course to cut rates at its September policy meeting.
The CME FedWatch tool shows that markets are assigning nearly 90% odds to a 25-basis-point (bps) cut, compared with 86% a week ago. What’s notable is that traders are also pricing in around a 10% chance of a more substantial 50-basis-point cut, which would indicate a distinctly more aggressive policy easing.
Such expectations have driven Treasury yields lower, applying further downward pressure on the USD. This environment has supported risk-sensitive currencies like the euro, pushing EUR/USD to 1.1780 and leaving the door open for a test of the 1.1800 handle.
Focus on US Inflation Data
Investors now turn their attention to upcoming US inflation reports, which could be decisive for the Fed’s trajectory. The Producer Price Index (PPI) for August is due on Wednesday, with the headline figure expected to rise 3.3% year-on-year, while the core PPI is projected to increase 3.5%.
Thursday will bring the Consumer Price Index (CPI) release, the most closely watched inflation gauge.
If the data confirm a disinflationary trend, market conviction for a September rate cut will strengthen further, potentially adding downside pressure on the US Dollar and extending the EUR/USD rally. Conversely, any upside surprises could temper expectations for aggressive easing, leading to renewed volatility in the currency markets.
ECB Expected to Hold Policy Steady
Despite the political turbulence, the ECB is widely anticipated to leave interest rates unchanged at its upcoming policy meeting on Thursday. This would mark the second consecutive meeting with no rate adjustment, reflecting the bank’s assessment that growth remains stable and inflation is hovering near its target.
Market participants will focus on the ECB’s forward guidance for clues on the policy path in the fourth quarter. Any indication of a more dovish tilt could limit the euro’s upside, while signals of confidence in the economic outlook may bolster the common currency further.
The divergence between the Fed’s likely easing and the ECB’s steady stance provides an additional layer of support for EUR/USD, at least in the short term.
Technical Outlook: EUR/USD Near 1.1800
From a technical perspective, the EUR/USD pair is showing strong upward momentum. Having reclaimed the 1.1750 support level, the pair is now eyeing the 1.1800 resistance zone. A sustained break above this level could open the path toward 1.1850 and 1.1900, key upside targets for the near term.
On the downside, immediate support lies at 1.1740, followed by 1.1700, which aligns with the 20-day moving average. As long as the pair trades above these support levels, the bullish bias is likely to remain intact.
Market Sentiment and Broader Implications
The interplay between Fed rate cut expectations, Eurozone politics, and ECB policy guidance is setting the tone for the EUR/USD. For now, the Fed’s dovish tilt is overshadowing uncertainties in France, giving the euro room to advance.
However, traders should be mindful that political shocks within the Eurozone can resurface quickly and potentially weigh on the single currency.
Meanwhile, the outcome of this week’s US inflation data will be pivotal. Softer readings could cement expectations for a more aggressive Fed cut, while stronger inflation could shift the narrative, triggering a corrective pullback in EUR/USD.
Conclusion
The EUR/USD pair is extending its winning streak, trading near 1.1780 and eyeing the 1.1800 handle, buoyed by US Dollar weakness as markets anticipate a September Fed rate cut. The CME FedWatch tool highlights a strong consensus for a 25 bps cut, alongside a growing minority expecting a 50 bps move.
Political developments in France and the upcoming ECB policy decision add further complexity, but the immediate focus remains on the US PPI and CPI releases later this week. For traders, the evolving interest rate outlook on both sides of the Atlantic will continue to dictate momentum, with EUR/USD potentially positioning for a decisive breakout if data reinforce the current market bias.
