Title: EUR/USD Recovers as Fed Rate Cut Bets Rise Following Soft U.S. Inflation Data
Original article credit: IBRAHIM BORA GOKALP, via FXStreet
The EUR/USD currency pair saw a notable rebound in the aftermath of the recent U.S. Personal Consumption Expenditures (PCE) Price Index data, as expectations for a potential interest rate cut by the U.S. Federal Reserve began to strengthen among investors. The euro-dollar pair recovered from previous lows, closing the session with a more optimistic outlook as inflation data indicated a cooling trend in price pressures. The development bolstered sentiment that the Fed may adopt a more dovish policy stance in the coming months.
Here’s an in-depth look at the dynamics surrounding the rebound of the EUR/USD pair, the implications of the U.S. inflation figures, and the broader market response.
US Core PCE Cools in August
The Bureau of Economic Analysis released the core Personal Consumption Expenditures Price Index for August, a key measure used by the Federal Reserve to assess inflationary pressure in the economy. The data came in slightly below expectations, further supporting the idea that inflation may be easing.
Key highlights from the PCE report:
– Core PCE for August rose 0.1% month-over-month, below the consensus of 0.2%
– On a yearly basis, core PCE slowed to 3.9% from July’s 4.3% YoY reading
– Overall PCE inflation (headline) remained unchanged at 3.5% YoY
This moderation in inflation readings suggests that price increases are settling, giving the Federal Reserve room to potentially pause or even reduce interest rates in the coming months. A slower inflation pace is typically viewed as reducing pressure on the central bank to continue tightening monetary policy.
Fed’s Preferred Inflation Gauge Sparks Market Reaction
With core PCE known as the Fed’s preferred inflation metric, the latest data had an immediate impact on market sentiment. Investors interpreted the figures as a sign that the central bank’s aggressive interest rate hikes over the past 18 months may have effectively curbed inflation.
As a result:
– Treasury yields eased: The U.S. 10-year Treasury yield fell from multi-year highs, dropping to around 4.57% on the day.
– Equity markets gained: Lower yields spurred investor risk appetite, with major U.S. stock indices closing modestly higher.
– Dollar Weakness: Most importantly for currency markets, the U.S. dollar weakened across the board, as rate differentials are a key driver of forex rates.
For the EUR/USD pair, which had been pressured by robust U.S. economic data and rising yields, the dip in PCE inflation pivoted the outlook, allowing the euro to pick up strength.
EUR/USD Rebounds after Testing Multi-Month Lows
Earlier in the week, the EUR/USD had fallen to its lowest levels since March, trading just above 1.0480. However, sentiment shifted following the inflation data release, pushing the pair back toward the 1.06 handle by the end of the session.
Chart analysis suggests:
– The EUR/USD pair has established a short-term support around the 1.0480 level.
– The 20-day moving average remains downward trending, indicating that the broader sentiment is still bearish unless the pair can sustainably break above 1.0650.
– On the upside, immediate resistance is seen around 1.0615-1.0630, followed by 1.0660.
From a technical perspective, while the fundamentals have offered the euro some breathing room, a true reversal would require a more consistent change in U.S. economic indicators or confirmation of a policy shift from the Fed.
Speculation on Fed Rate Cuts Grows
Traders in the interest rate futures market responded quickly to the softer PCE report, adjusting their expectations for the path of U.S. monetary policy. The CME FedWatch Tool indicated a
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