EUR/USD steadies above 1.1700 after US PPI miss, attention shifts to ECB

EUR/USD edges higher as the US Dollar weakens after soft PPI data.
US PPI fell 0.1% MoM in August, reinforcing bets on a Fed rate cut next week.
Focus shifts to Thursday’s U.S. CPI and ECB policy decision for fresh direction.

Vishal Chaturvedi FXStreet

The Euro (EUR) is edging modestly higher against the US Dollar (USD) on Wednesday, as the Greenback lost momentum after weaker-than-expected US Producer Price Index (PPI) figures added to market bets that the Federal Reserve (Fed) will deliver a rate cut next week.

At the time of writing, the EUR/USD pair is trading around 1.1710 after briefly touching its highest level since July 24 on Tuesday. Meanwhile, the US Dollar Index (DXY), which tracks the value of the Greenback against a basket of six major currencies, is ticking lower around 97.70.

The August PPI report underscored cooling price pressures at the wholesale level. Headline prices fell 0.1% MoM, well short of the expected 0.3% rise, while July’s figure was revised lower to 0.7% from 0.9%. On a yearly basis, headline inflation slowed to 2.6% YoY, down from 3.3% previously forecast. Core PPI, which strips out food and energy, also declined 0.1% MoM, with the annual rate easing to 2.8% from 3.7%. The softer-than-expected readings reinforced the case for policy easing, though analysts noted the figures were not weak enough to justify an outsized 50 bps cut.

Attention now turns to Thursday’s twin risk events — the release of the US Consumer Price Index (CPI) and the European Central Bank’s (ECB) monetary policy decision. The CPI print will serve as the final major inflation checkpoint ahead of next week’s Fed meeting, while the ECB is widely expected to hold rates steady after several cuts earlier this year that lowered the deposit rate to 2.0%. With Eurozone inflation now close to the 2% target and wage pressures easing, policymakers are seen signaling that the easing cycle is nearing its end.

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.

GBP/USD revisits 1.3530; Dollar pushes harder

GBP/USD adds to the weekly correction and recedes toward the 1.3530 zone on Friday. Indeed, Cable faces increasing selling pressure on the back of extra gains in the Greenback, particularly fuelled by Chair Warsh’s speech at the Jackson Hole Symposium and the US NFP Annual Revision (-79K).

EUR/USD breaches below 1.1600, multi-day lows

EUR/USD now accelerates its decline and retreats to seven-day troughs in the sub-1.1600 region at the end of the week. The pair’s pullback comes on the back of the strong rebound in the US Dollar after Chair Warsh delivered a hawkish message in Jackson Hole, while the US NFP Annual Revision came in at -79K.

Gold challenges its 200-day SMA near $4,530

Gold’s decline gathers fresh steam, hitting weekly lows while disputing its critical 200-day SMA near $4,530 per troy ounce. The yellow metal’s increasing weakness comes in response to the generalised upbeat tone in the US Dollar and the widespread rebound in US Treasury yields, as investors continue to reprice a Fed rate hike in September.

Week ahead: RBNZ and BoC decide on rates ahead of all-important US NFP

The US dollar staged a modest recovery this week, perhaps as traders decided to cover some of their short positions amid slightly stickier or in-line US PCE inflation numbers for July, confounding expectations of softer prints amid the softness revealed in the CPI data for the month.

CFTC Report: CAD short covering leads; Gold buying surges

The week in one sentence: speculative positioning shifted more constructively in the week to August 25. CAD short covering led the move, followed by a broad reduction in EUR shorts and renewed Gold buying. GBP and VIX positioning also improved, while JPY positioning deteriorated and WTI flows diverged from weaker prices.

Diesel’s record $100 warning: The oil shock hiding in plain sight

The Oil market may look calmer than it did a few months ago, but diesel is sending a very different message. The US diesel crack spread, the premium of ultra-low sulphur diesel futures over WTI, recently surged above $100 per barrel for the first time, reaching an intraday record of just over $102.00.