EUR/USD dives below 1.1100 on soft German inflation, upbeat US Q2 GDP

• EUR/USD dives below 1.1100 as lower inflation in Spain and Germany weighs on the Euro.
• Upwardly revised US Q2 GDP estimates strengthen the US Dollar.
• The US core PCE inflation data could influence market expectations for Fed rate-cut size in September.

EUR/USD faces a sharp sell-off, sliding below the round-level support of 1.1100 in Thursday’s North American session. The major currency pair corrects further on multiple headwinds. Upwardly revised Q2 Gross Domestic Product (GDP) has resulted in a sharp recovery in the US Dollar (USD).  The US Dollar Index (DXY) – which tracks the Greenback’s value against six major currencies – jumps to near 101.35. Apart from that, preliminary inflation data from Spain and Germany showed that price pressures continued to abate in August, increasing bets of an upcoming interest-rate cut by the European Central Bank (ECB) and weighing on the Euro (EUR).

The updated US Q2 GDP report showed that the economy expanded, on an annualized basis, at a robust pace of 3% against flash estimates of 2.8%. Stronger-than-flash print of GDP growth has eased fears of the US entering a recession. 

Upbeat US Q2 GDP data is also expected to weigh on expectations that the Federal Reserve (Fed) will cut interest rates by 50 basis points (bps) in September, the month in which the central bank seems certain to pivot to policy normalization. The expectations for Fed rate cuts in September rose after  Fed Chair Jerome Powell said, " The time has come for policy to adjust," and vowed to support deteriorating labor market strength in his speech at the Jackson Hole (JH) Symposium.

Later this week, investors will focus on the United States (US) Personal Consumption Expenditure Price Index (PCE) data for July on the horizon. The underlying inflation data is expected to influence market speculation for the likely size of Federal Reserve (Fed) interest-rate cuts in September.

The PCE inflation report is expected to show that the annual core inflation rose by 2.7% in July, faster than the 2.6% seen in June. Month-over-month, core PCE is estimated to have grown steadily by 0.2%.

Daily digest market movers: EUR/USD tumbles as soft German inflation boosts ECB rate cut bets

• EUR/USD skids below 1.1100 after a sharp slowdown in German and Spain inflation weakens Euro. The annual Harmonized Index of Consumer Prices (HICP) in Spain came in at 2.4%, the slowest in year-to-date (YTD). In the same period, the annual German HICP decelerated at a faster pace to 2%, the lowest in more than three years, from the estimates of 2.3% and the prior release of 2.6%. Germany's month-on-month HICP deflated by 0.2%, which was anticipated to remain flat.
• The speculation for ECB September rate cuts was already firm amid consistently easing Eurozone price pressures and its poor economic outlook, as suggested by the flash HCOB PMI report for August. However, the Eurozone Economic Sentiment Indicator, Industry Confidence, and Services Sentiment have come in better than expected in August. On the contrary, Consumer Confidence deteriorated to -13.5 from the estimates and the former release of -13.4.
• The ECB is also expected to deliver an additional rate cut somewhere in the last quarter of the year. A few ECB policymakers appear to be comfortable with the central bank reducing its key borrowing rates further this year.
• Dutch policymaker Klaas Knot said to a conference panel on Tuesday that "as long as our disinflation path still converges to a return to 2% inflation at or before the end of 2025, then I'm comfortable with gradually taking our foot off the brake." When asked about September rate cut expectations, Knot said: "I will have to wait until I have the full data and information set going into that meeting to decide my position on whether September is appropriate,” adding that "I would have to do so again in October, December and whenever," reported Reuters.
• Going forward, investors will focus on the Eurozone flash HICP data for August will be published on Friday. Eurozone annual headline and core- which excludes volatile items- HICP is estimated to have grown at a slower pace of 2.3% from 2.6% in July. Month-over-month, the HICP is forecasted to have remained flat after rising 0.5% in July. 

Technical Analysis: EUR/USD sees support near 20-day EMA

EUR/USD falls sharply below 1.1100 after failing to extend its upside above the crucial resistance of 1.1200. The near-term outlook of the major currency pair is still firm as all short-to-long-term Exponential Moving Averages (EMAs) are sloping higher. 

Earlier, the major currency pair strengthened after breaking above the Rising Channel formation on a daily timeframe. 

The 14-day Relative Strength Index (RSI) has declined below 60.00 after turning overbought near 75.00.

On the upside, the recent high of 1.1200 and the July 2023 high at 1.1275 will be the next stop for the Euro bulls. The downside is expected to remain cushioned near the psychological support of 1.1000.

(The story was corrected at 10:25 GMT to say in the first paragraph that " EUR/USD faces a sharp sell-off, sliding below the round-level support of 1.1100 in Thursday’s European session not 1.100)