EUR/USD Weekly Outlook: U.S. Dollar Slips Amid Growing September Rate Cut Expectations
Original article by Kenny Fisher, Forex Crunch
The EUR/USD pair posted a modest gain over the past week, buoyed by a weakening U.S. dollar as traders increase bets on a potential Federal Reserve rate cut in September. Although the pair did not experience dramatic swings, the overall trend favored the euro as markets recalibrated expectations on future monetary policy from both the European Central Bank (ECB) and the Federal Reserve.
Key Weekly Highlights
– EUR/USD opened the week near the 1.0880 level and closed slightly above 1.0900, reflecting a gradual upward trend.
– Market sentiment shifted in favor of a Federal Reserve rate cut in September, fueled by soft inflation data and dovish commentary from central bank officials.
– The ECB gave no clear signals of immediate action, creating divergence between Eurozone and U.S. central bank expectations.
– Economic data from both Europe and the United States provided mixed signals, encouraging cautious optimism from euro bulls.
Federal Reserve Watch: Increasing Odds of Rate Cuts
The U.S. economy appears to be cooling, leading traders and analysts to consider a September interest rate reduction as a stronger possibility. The latest batch of inflation reports, particularly the Consumer Price Index (CPI) and Producer Price Index (PPI), showed limited upward pressure on prices. This helps support the view that the Fed may move toward easing monetary conditions in the coming months.
Key contributing factors include:
– July’s CPI showed a modest 0.2% month-over-month increase, aligning with market expectations. The annual inflation rate slowed from 3.1% in June to 3.0% in July.
– Core CPI, which excludes food and energy prices, rose just 0.2% on the month, adding to evidence of moderating underlying inflation.
– The Producer Price Index (PPI) also fell short of expectations, showing minimal inflation at the wholesale level.
– Commentary from Federal Reserve members, including Atlanta Fed President Raphael Bostic and Chicago Fed President Austan Goolsbee, suggested that rates may be high enough already and that further hikes could pose economic risks.
– Fed funds futures now price in a greater than 60% chance of a rate cut by September, a notable increase compared to just weeks earlier.
The dovish tilt in investor sentiment resulted in a notable slip in the U.S. dollar index (DXY), which fell below 102.50, its lowest level in over a month. The weakening dollar provided tailwinds for EUR/USD as traders adjusted their positions accordingly.
ECB Policy: Wait-And-See Mode
While the Federal Reserve appears increasingly dovish, the European Central Bank maintains a more conservative posture. The ECB has signaled caution regarding monetary policy adjustments, choosing instead to monitor incoming economic data.
ECB officials have not committed to further rate increases or reductions, opting to hold policy steady while preserving the flexibility to act if necessary. Key takeaways include:
– ECB President Christine Lagarde reiterated that inflation remains above target and that the central bank will remain vigilant.
– Eurozone inflation data has shown signs of cooling but remains relatively elevated, particularly in services and food-related sectors.
– The ECB is closely monitoring wage dynamics and labor market conditions, both of which are contributing to persistent inflationary pressures.
– Market participants mostly expect the ECB to hold rates steady for the remainder of 2025, though a rate cut in early 2026 is increasingly priced in.
This uncertain outlook from the ECB contributed to limited momentum in the euro despite dollar softness. However, the currency found support due to relatively favorable trade balances and improving investor sentiment in Europe.
Economic Data Review: United States
Economic indicators from the United States painted a mixed picture over the past week. On one hand, inflation appears to be moderating, which fuels hopes for a rate cut. However, other indicators signal continued resilience in parts of the economy.
Highlights from U.S. data
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