EUR/USD hangs near multi-month low, defends 1.1000 mark ahead of ECB meeting

EUR/USD holds steady above the 1.1000 mark as traders keenly await the ECB policy decision.
Reduced bets for a more aggressive Fed easing underpin the USD and cap gains for the major.
Traders seem reluctant ahead of the key central bank event risk and the release of the US PPI.

Haresh Menghani FXStreet

The EUR/USD pair struggles to gain any meaningful traction during the Asian session on Thursday and oscillates in a narrow band, just above the 1.1000 psychological mark, or a four-week low touched the previous day. Traders seem reluctant and opt to wait for the highly-anticipated European Central Bank (ECB) policy meeting before positioning for the next leg of a directional move.

The ECB is widely expected to lower interest rates by 25 basis points (bps) amid signs of cooling inflation in the Eurozone. The bets were reaffirmed by the data showing that the German Consumer Price Index (CP) print fell to its lowest level in over three years in August and touched the ECB's 2% target. This, in turn, undermines the shared currency and acts as a headwind for the EUR/USD pair amid a modest US Dollar (USD) strength.

The US CPI report released on Wednesday indicated that consumer prices in the US are easing overall. The core CPI, however, suggested that the underlying inflation remains sticky and dashed hopes for a larger rate cut by the Federal Reserve (Fed) next week. This is reinforced by an uptick in the US Treasury bond yields and lifts the USD Index (DXY), which tracks the buck against a basket of currencies, closer to the monthly peak.

That said, the markets have fully priced in the prospects for an imminent start of the Fed's policy easing cycle and a 25 bps rate cut at the end of the September 17-18 FOMC meeting. This, along with the upbeat market mood, caps any further appreciating move for the safe-haven Greenback. This should continue to offer some support to the EUR/USD pair heading into the key central bank event risk and warrants caution for bearish traders.

Investors might also prefer to wait for the ECB's updated economic projections, which, along with ECB Christine Lagarde's comments, will influence the Euro. Apart from this, the release of the US Producer Price Index (PPI) might provide a fresh impetus to the EUR/USD pair and produce some meaningful trading opportunities later during the North American session.

Economic Indicator

ECB Main Refinancing Operations Rate

One of the three key interest rates set by the European Central Bank (ECB), the main refinancing operations rate is the interest rate the ECB charges to banks for one-week long loans. It is announced by the European Central Bank at its eight scheduled annual meetings. If the ECB expects inflation to rise, it will increase its interest rates to bring it back down to its 2% target. This tends to be bullish for the Euro (EUR), since it attracts more foreign capital inflows. Likewise, if the ECB sees inflation falling it may cut the main refinancing operations rate to encourage banks to borrow and lend more, in the hope of driving economic growth. This tends to weaken the Euro as it reduces its attractiveness as a place for investors to park capital.

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