The EUR/USD pair has recovered some of its losses, trading around 1.10764 this Friday. However, the upward trend remains limited due to caution ahead of significant economic data releases from both the Eurozone and the United States. Investors are awaiting the Eurozone’s Harmonized Index of Consumer Prices (HICP) report for July, which could provide insights into the European Central Bank’s (ECB) stance on interest rates. At the same time, the strong U.S. GDP growth of 3.0% in the second quarter bolsters the U.S. dollar and reduces the likelihood of a substantial interest rate cut by the Federal Reserve in September.
Consumer Price Index (CPI) data from Germany and Spain indicate a slowdown in inflation for August, increasing expectations for an interest rate cut by the ECB and putting pressure on the euro. These developments suggest that investors will likely remain cautious, as inflation in the Eurozone is more under control, potentially paving the way for monetary easing. However, persistent inflation in the services sector may limit a significant decline in the euro. As a result, the pair may continue to trade within a narrow range until clearer signals emerge from upcoming economic data.
Today, the Eurozone will release its CPI data. Market estimates suggest that the CPI will be 2.2%, down from 2.6% in July. Core inflation is expected to decrease to 2.8%, compared to 2.9% in July. In my view, a decline in inflation in Germany and the Eurozone supports the case for another interest rate cut next month. The weakened Eurozone economy and the Federal Reserve’s willingness to cut rates also reinforce expectations for a rate reduction. Meanwhile, concerns about wage increases may prompt the ECB to delay a rate cut.
Currently, the market prices in expectations for a Federal Reserve rate cut next month, aligning the U.S. central bank with the global trend of easing monetary policy as inflation threats have largely subsided. Most Federal Open Market Committee (FOMC) members support a rate cut in September, but Federal Reserve Bank of Atlanta President Raphael Bostic stated on Wednesday that the Fed should wait for additional data before cutting rates, as reducing rates and then having to raise them again would be a significant error.
The yield on the 10-year U.S. Treasury bond is currently 3.82%, showing signs of stabilization after a recent decline. The chart indicates a general downtrend, with the yield attempting to break the 50-day exponential moving average at 3.84%.
If the yield fails to rise, it suggests that investors expect lower interest rates in the future, which could weaken the U.S. dollar in the medium term. The Dollar Index (DXY) tends to move in tandem with yields, as higher yields attract more foreign investment, strengthening the dollar. Thus, today’s data is crucial in determining the direction of bond yields and the dollar, as well as broader market trends. However, a breakout above the 3.84% level could signal a rebound in both yields and the dollar.
