Euro struggles near 1.1600 vs USD as Fed hike bets and hawkish ECB clash ahead of US CPI

EUR/USD attracts some sellers for the second straight day, though the downside remains limited.
Rising September Fed rate hike bets and geopolitical risks underpin the USD, weighing on the pair.
The ECB’s hawkish rate hike on Thursday lends support to the Euro and limits losses for spot prices.

Haresh Menghani FXStreet

The EUR/USD pair remains under some selling pressure for the second straight day on Thursday, though it lacks follow-through and holds above the weekly low, which it touched the previous day. Spot prices hover around the 1.1600 mark as traders keenly await the release of the latest US consumer inflation figures, due later today.

The crucial US Consumer Price Index (CPI) report will be looked at for more cues about the Federal Reserve's (Fed) policy path, which will drive the US Dollar (USD) and provide a fresh impetus to the EUR/USD pair. In the meantime, the US Producer Price Index (PPI) on Thursday underscored still sticky inflationary pressures and prompted traders to lift bets for a September Fed rate hike amid inflation risks stemming from higher oil prices. This, along with escalating US-Iran tensions, continues to underpin the safe-haven Greenback and weighs on the EUR/USD pair.

In the latest developments surrounding the Middle East crisis, the US Treasury plans to sanction a large, undisclosed bank on Monday as part of its ongoing economic pressure campaign against Iran. Moreover, Iran-backed Houthis in Yemen seized the crucial Red Sea city of Mocha, expanding control over the strategic Bab al-Mandeb Strait and adding to market concerns about a prolonged disruption to supplies. This, in turn, keeps the geopolitical risk premium in play, which lifted oil prices to the highest since May 21 and should continue to benefit the USD.

The downside for the EUR/USD pair, however, remains cushioned on the back of the European Central Bank's (ECB) hawkish outlook on Thursday. As was widely expected, the ECB raised interest rates for the second time this year and warned that price pressures could last longer than it had anticipated, lifting bets on more policy tightening as soon as October. This, in turn, could lend some support to the Euro, warranting caution before placing fresh bearish bets on the currency pair and positioning for any further near-term depreciating move.

EUR/USD 4-hour chart

Technical Analysis

The EUR/USD pair holds a fragile constructive stance above the 200-period Exponential Moving Average (EMA) at 1.1585. However, the upside momentum is fading as spot prices stalled just under the 23.6% Fibonacci retracement at 1.1627. A sustained break above this barrier would be needed to revive a more convincing bullish tone.

On the downside, initial support is provided by the 200-period EMA at 1.1585, followed closely by the 38.2% Fibo. retracement at 1.1575. Deeper pullbacks could target the 50.0% retracement at 1.1534 and then the 61.8% level at 1.1492, ahead of more significant Fibonacci support near 1.1433.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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