EUR/USD dips as German inflation falls, ECB rate cut looms

• German HICP inflation falls to 2%, increasing the likelihood of further ECB rate cuts and downward revisions to growth forecasts.
• ECB expected to lower rates by 25 bps while maintaining a restrictive policy stance to combat inflation risks.
• US CPI data could influence Fed rate expectations, with a 70% chance of a 25 bps cut and 30% for a 50 bps cut.

The EUR/USD retreated on Tuesday after the latest inflation report in Germany, which increased the likelihood of another interest rate cut by the European Central Bank (ECB). At the time of writing, the EUR/USD trades at 1.1021, virtually unchanged, as Wednesday’s Asian session begins.

EUR/USD retreats to 1.1021 as lower German inflation fuels expectations of a 25 bps ECB rate cut on Thursday

Wall Street ended the session with decent gains, while the Greenback is almost flat. Data during the European session witnessed German inflation falling to its lowest level in over three years as the Harmonized Index of Consumer Prices (HICP) hit 2%, the ECB’s goal.

On Thursday, the ECB is expected to lower interest rates by a quarter of a percentage point, yet according to analysts at BBH, the central bank would emphasize that “it will keep policy sufficiently restrictive for as long as necessary."

Besides that, the ECB is expected to update its economic projections, which include a downward revision of economic growth and inflation. Money market traders continue to price in 50 to 75 basis points of cuts toward the end of the year.

Ahead of the week, August's US Consumer Price Index (CPI) is expected to dip towards the Fed’s 2% goal. A lower-than-expected CPI report could increase the odds of the Federal Reserve easing rates by 50 basis points, though most analysts expect the Fed to adjust policy gradually.

The CME FedWatch Tool shows that the odds for a 25 bps rate cut are 70%, while for a 50 bps rate cut, they are 30%.

EUR/USD Price Forecast: Technical outlook

From a technical standpoint, the EUR/USD remains neutral with an upward bias. However, a decisive break below the September 3 low of 1.1026 could open the door to further downside. Key support levels, such as the 1.1000 mark, will be exposed, followed by the 50-day moving average (DMA) at 1.0958. A breach of this level could lead to a test of the confluence of the 100 and 200-DMAs around 1.0867/58, before targeting the August 1 swing low at 1.0777.

For a bullish resumption, buyers would need to lift the pair above the September 9 high at 1.1091.