EUR/USD stays in tight range with US inflation in focus

• EUR/USD consolidates above 1.0900 as investors await July’s US CPI data for fresh guidance on the Fed’s interest-rate path.
• Market speculation for a 50 basis points interest-rate cut in September has diminished.
• ECB Rehn supports more rate cuts to boost Eurozone economic growth.

EUR/USD edges slightly lower but holds the key support level of 1.0900 in Tuesday’s European session. The major currency pair trades broadly sideways as investors appear to be sidelined ahead of the United States (US) Producer Price Index (PPI) data, which will be published at 12:30 GMT. 

The producer inflation data will indicate how much the prices of goods and services were changed by owners at factory gates. Generally, prices of final goods are influenced by input prices and consumer demand. 

Economists expect that monthly headline PPI barely rose last month. The core PPI, which excludes volatile food and energy prices, is expected to grow at a slower pace of 0.2% compared with the 0.4% increase seen in June. Annual headline and core PPI are estimated to have decelerated by three-tenths to 2.3% and 2.7%, respectively.

US PPI data is expected to have a limited impact on the US Dollar (USD) – unless the data diverge significantly from expectations – as the major trigger will be the Consumer Price Index (CPI) data for July, which will be published on Wednesday. The inflation data will significantly influence market speculation about the size and timing of interest rate cuts by the Federal Reserve (Fed) for the entire year.

Daily digest market movers: EUR/USD moves sideways ahead of US PPI data 

EUR/USD exhibits a subdued performance as the US Dollar edges higher as investors focus on the US CPI inflation data for July. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, remains steady above 103.00. 

Annual headline and core inflation is expected to have decelerated by one-tenth to 2.9% and 3.2%, respectively, with monthly figures growing by 0.2%. The inflation data will indicate whether the Fed will adopt a cautious policy-easing approach or will choose to reduce interest rates more aggressively.

According to the CME FedWatch tool, 30-day Federal Funds Futures pricing data shows that traders see a 47.5% chance that interest rates will be reduced by 50 basis points (bps) in September. The likelihood of a 50 bp rate reduction has weakened significantly from the 68% recorded a week ago.

Meanwhile, the Euro (EUR) is being guided by market speculation for European Central Bank (ECB) rate cuts amid an absence of top-tier Eurozone economic data. Still, the German and Eurozone ZEW survey data for August will be watched by investors, which will be published at 09:00 GMT.

Economists are mixed about the ECB’s monetary policy outlook, namely whether the central bank will cut interest rates aggressively or use a calibrated approach.

The Eurozone economy grew faster than expected in the second quarter, but its largest country, Germany, is facing a vulnerable demand from domestic and overseas markets. The German GDP contracted by 0.1% in the second quarter of this year. 

Last week, Finnish ECB policymaker Olli Rehn said that “rate cuts would help the eurozone economy recover, in particular the fragile industrial growth and subdued investments,” Reuters reported.

Technical Analysis: EUR/USD holds key 200-day EMA

EUR/USD trades close to near the upper boundary of the Channel formation on the daily time frame. A breakout of the aforementioned chart pattern would result in wider ticks on the upside and heavy volume. The 200-day Exponential Moving Average (EMA) near 1.0800 has acted as major support for the Euro bulls.

The 14-day Relative Strength Index (RSI) returns inside the 40.00-60.00 range, remaining close to its upper boundary. If the RSI sustains above 60.00, a bullish momentum will trigger.

More upside would appear if the major currency pair breaks above the August 5 high of 1.1009. This would drive the asset towards August 10, 2023, high at 1.1065, followed by the round-level resistance of 1.1100. 

In an alternate scenario, a downside move below August 1 low at 1.0777 would drag the asset toward February low near 1.0700. A breakdown below the latter would expose the asset to June 14 low at 1.0667.