Original article credited to Pablo Piovano, FXStreet.
Title: EUR/USD Forecast: Euro Advances as US CPI Report Weakens Dollar
The EUR/USD pair saw a significant upward movement following the release of the latest Consumer Price Index (CPI) data from the United States. The softening inflation figures led to widespread dollar weakness, propelling the euro higher in forex markets. This shift marks a notable change in direction for the pair, which had previously been trading under pressure amid signs of sticky U.S. inflation and resilient economic data.
In this updated analysis, we will explore the underlying drivers of the EUR/USD rally, review technical indicators, and assess what traders and investors can expect in the near term. The outlook for the pair is now increasingly bullish, supported by growing expectations of Federal Reserve rate cuts and improved risk sentiment across financial markets.
US CPI Report Triggers USD Selloff
The primary catalyst for the latest EUR/USD rally came from the U.S. CPI report for July, which offered a softer inflation reading than markets had anticipated. Headline inflation rose 0.2 percent month-over-month, matching expectations, while core inflation also rose by 0.2 percent for the month, leading to an annual core CPI rate of 4.7 percent, slightly lower than the consensus of 4.8 percent.
Key highlights of the CPI report:
– Headline CPI increase for July: 0.2 percent month-over-month
– Annual headline CPI rose to 3.2 percent from 3.0 percent in June, though this was still slightly below forecasts of 3.3 percent.
– Core CPI (excluding food and energy) climbed 0.2 percent month-over-month.
– Annual Core CPI: 4.7 percent, down from 4.8 percent
Market Reaction
The softer-than-expected inflation data prompted markets to reassess their expectations about future Federal Reserve interest rate hikes. Prior to the report, there had been significant speculation that rates could stay higher for longer due to stubborn inflation. The July numbers, however, suggest that price pressures may be easing at a faster pace.
Following the release:
– The U.S. dollar declined across the board, especially against risk-sensitive currencies and majors like the euro.
– Treasury yields fell, with the benchmark 10-year yield retreating from recent highs.
– Stock indices edged higher, encouraged by the prospect of the Fed nearing the end of its rate hike cycle.
The combination of lower yields and increased demand for higher-risk assets played a major role in lifting EUR/USD above recent resistance levels.
Eurozone Economic Outlook Remains Sluggish
While the euro advanced on dollar weakness, the underlying economic conditions in the Eurozone remain mixed at best. Recent data point to stagnating growth and weak manufacturing activity across the region. The European Central Bank (ECB) is also approaching the end of its rate hike campaign, with inflation cooling and economic growth showing signs of fatigue.
Recent Eurozone developments:
– Eurozone GDP grew just 0.3 percent in the second quarter, compared to 0.1 percent in the previous period.
– Inflation figures have continued to slow, with the headline Harmonized Index of Consumer Prices (HICP) falling to 5.3 percent year-over-year from 5.5 percent.
– Core inflation remained stable at 5.5 percent but showed no acceleration, easing ECB fears of an inflation spiral.
Despite these mixed signals, EUR/USD was able to extend its rally largely thanks to external factors, especially the dollar’s retracement and shifting global sentiment in favor of riskier assets.
Federal Reserve Rate Outlook Shifts
With U.S. inflation data coming in softer than expected, markets are increasingly betting that the Federal Reserve will pause rate hikes in the coming months. Current projections suggest limited upside for further monetary tightening, and the December Fed Funds Futures are now pricing in interest rate cuts as early as March 2025.
Market expectations on Fed policy:
– The CME Fed
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