Title: EUR/USD Surges as Fed Rate Cut Outlook Strengthens Following PCE Data
Author: Based on original reporting by FXStreet staff
The EUR/USD currency pair moved higher on Thursday, buoyed by growing speculation that the Federal Reserve could begin easing interest rates as soon as September. The rally followed the release of the US core Personal Consumption Expenditures (PCE) Price Index, which showed signs of cooling inflation and reinforced expectations that the US central bank may be nearing a pivot in monetary policy.
Key Takeaways:
– Core PCE prices, the Federal Reserve’s preferred inflation metric, rose less than anticipated in August.
– Markets are now assigning greater odds to a Fed rate cut in September.
– EUR/USD rebounded strongly after hitting a two-month low earlier in the week.
– Broader weakness in the US dollar also contributed to the euro’s gains.
– Economic divergence between the US and eurozone may still constrain the upside for EUR/USD in the medium term.
Let’s break down the latest developments impacting the currency pair in greater detail.
US Core PCE Report: Inflation Cooling Q3
On Thursday, the US Bureau of Economic Analysis (BEA) released the core PCE Price Index for August, a closely watched indicator of inflation that excludes the volatile food and energy components. The monthly increase came in at 0.1%, below forecasts for a 0.2% rise. On an annualized basis, core PCE climbed 3.9%, as expected, compared to a revised 4.3% for July.
The moderation in monthly inflation provided some relief to market participants who have been concerned that rising fuel costs and persistent strength in the US economy could reignite inflation pressure and force the Federal Reserve to maintain higher interest rates for longer.
The headline PCE figure also showed a small gain of 0.4% month-over-month in August and 3.5% year-on-year, both slightly above the core readings due to energy price increases. However, since the Fed focuses on core inflation as a more reliable signal of underlying trends, the muted core readings carried more weight in shaping market expectations.
Fed Rate Cut Bets Accelerate
Following the data release, investors quickly adjusted their expectations regarding the Fed’s future policy path:
– The CME FedWatch Tool indicated that markets now see over a 60% probability of a rate cut by September 2024, up from under 50% earlier in the week.
– Treasury yields retreated across the curve, with the benchmark 10-year yield falling as much as 10 basis points to below 4.50%.
– Equity markets rose in response to easing rate concerns, with the S&P 500 climbing over 0.5% on the day.
– Rate-sensitive sectors such as real estate and utilities outperformed in equity markets.
Market participants viewed the cooling inflation as a signal that the Fed might be nearly finished with its hiking cycle. Federal Reserve officials, while continuing to emphasize a data-dependent approach, have noted in recent statements that the risks to economic growth and inflation may now be more balanced.
EUR/USD Technical Rebound Within Downtrend
Against this backdrop, the euro benefited from broader US dollar weakness. The EUR/USD pair bounced from its recent low of 1.0480 earlier in the week and surged closer to 1.0600 following the PCE release.
Technical indicators suggest that although the pair has rebounded, risks remain to the downside unless the euro can secure a firm hold above key resistance levels:
– Support lies at 1.0480, the recent low and also a strong demand zone from September.
– Resistance is seen around 1.0630, corresponding to the 20-day moving average.
– The Relative Strength Index (RSI) is recovering from oversold territory, suggesting further near-term upside is possible.
“This data has offered some breathing room for the single currency,” said Eren Sengezer of FXStreet, noting that the dollar’s
Read more on USD/CAD trading.