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.

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