EUR/USD retreats to 1.1000 on fears of ECB peak rates, hawkish Fed moves on upbeat US CPI

EUR/USD begins the key inflation week on a back foot, after rising in the last two consecutive days, as sellers attack the 1.1000 psychological magnet during the early hours of Monday’s Asian session. In doing so, the Euro pair retreats from a three-week-old falling resistance line amid fears of the European Central Bank’s (ECB) peak rates, as well as hawkish concerns about the Federal Reserve (Fed) as the key US inflation data loom.

The chatters about the ECB peak rates were triggered by the global rating agency Fitch Ratings as it said on Friday that the falling Eurozone inflation puts the ECB rates peak within sight. On the same line was the European Central Bank (ECB) article which stated that the “underlying inflation likely peaked in the first half of 2023.”

It should be noted that the Eurozone statistics were mixed in the last week, suggesting easy inflation conditions in the bloc, which in turn backed the dovish concerns about the old continent’s central bank. That said, preliminary readings of Eurozone inflation, per the Harmonised Index of Consumer Prices (HICP), eased in July whereas the Eurozone Gross Domestic Product (GDP) for the second quarter (Q2) of 2023 rose. Further, the bloc’s Producer Price Index (PPI) for June dropped to the lowest level in three years. Additionally, Eurozone Retail Sales for June came in mixed as MoM figures deteriorated to -0.3% MoM versus 0.2% expected and 0.6% prior but the yearly growth improved to -1.4% YoY compared to -1.7% market forecasts and -2.4% previous readings.

On the other hand, Federal Reserve (Fed) Governor Michelle Bowman said during the weekend that the Fed should remain willing to raise the federal funds rate at a future meeting if the incoming data indicate that progress on inflation has stalled. Previously, Atlanta Federal Reserve Bank President Raphael Bostic said on Friday to Bloomberg, that the central bank is likely to keep monetary policy in a restrictive territory well into 2024. On the contrary, Chicago Fed President Austan Goolsbee stated that they should start thinking about how long to hold rates.

Talking about the US data, the headline US employment report posted a softer-than-expected Nonfarm Payrolls (NFP) figure of 187K, versus 185K prior (revised) and 200K market forecasts, whereas the Unemployment Rate eased to 3.5% from 3.6% expected and previous readings. Further, the Average Hourly Earnings reprinted 0.4% MoM and 4.4% YoY numbers by defying the expectations of witnessing a slight reduction in wage growth.

Also notable is the fact that the ISM Manufacturing PMI for July improved a bit but the more important Services PMI dropped for the said month. Additionally, US Factory Orders edged higher for June and so did the second-tier employment-linked data like Nonfarm Productivity and JOLT Job Openings. However, the Q2 Unit Labor Cost eased and troubled favoring the Fed’s September rate hike.

Considering these data, the market’s bets on the Fed’s September rate hike eased from 20.0% to 13% on a weekly basis, per the CME’s FedWatch Tool.

Amid these plays, the US Treasury bond yields eased from a multi-day high and allowed the EUR/USD to pare some of the weekly losses before the latest retreat.

Looking ahead, this week’s US inflation numbers, namely the Consumer Price Index (CPI) and Producer Price Index (PPI) for July for clear directions.

Technical analysis

EUR/USD pair’s latest pullback could be linked to its failure to cross a three-week-old descending resistance line, around 1.1010 at the latest, which in turn joins the bearish MACD signals to direct sellers toward the 100-DMA retest, close to 1.0925 by the press time.