EUR/USD to continue to trade within between 1.16 and 1.18 – Commerzbank

There has been rather low volatility on the currency markets in recent weeks, and EUR/USD has not broken through 1.18 since the beginning of July. However, there would have been plenty of triggers for this. The US government is still trying to remove Lisa Cook from the FOMC (yesterday, the government appealed against the decision to allow her to remain in office for the time being); the labour market report for August was significantly weaker than expected; and job growth between April 2024 and March 2025 was revised downwards much more than anticipated this week, Commerzbank's FX analyst Michael Pfister notes.

Greater risk of an upside surprise in the inflation figures

"And what about EUR/USD? It has moved up by half a cent since last Thursday. In spring, we would probably have achieved something like this in a matter of minutes with such a sequence of events. But is this also exceptionally low volatility? After all, it is the summer holidays. It always depends on the point of comparison. Last year, we saw high volatility fuelled by a weak US labour market report in July and a 50-basis-point interest rate cut in September. Compared to previous years, however, the picture is quite different. Between 2017 and 2021, in particular, the standard deviation between the beginning of July and the end of September was similar to what we have seen this year."

What triggers could give the currency market a new direction? For a fundamental upward revaluation, we would probably need a catalyst that makes faster interest rate cuts by the Fed more likely. One possibility would be significantly lower US inflation figures, as this would allow the Fed to focus more on its second mandate of addressing the weakening US labour market. Another possibility would be an unexpected interest rate cut of 50 basis points next week. In such a scenario, EUR/USD is likely to reach 1.18 again.

"Our economists currently anticipate a greater risk of an upside surprise in the inflation figures, and much still suggests a smaller interest rate cut of 25 basis points next week. Therefore, it is more likely that EUR/USD will continue to trade within the fairly narrow range of 1.16–1.18. It is only when it becomes clear that the Fed will deliver further significant interest rate cuts in the coming months while the ECB shows no signs of lowering interest rates further, and Donald Trump continues to undermine the Fed's independence, that we are likely to break through the 1.18 level on a sustained basis. Nevertheless, I fear this is more likely to be a story for the coming months."