EUR/USD steadies below 1.1100 as Eurozone, US inflation looms

• EUR/USD trades sideways below 1.1100 as investors await key inflation data from the Eurozone as well as the US.
• Soft German inflation boosted hopes of another ECB interest-rate cut in September.
• Upwardly revised US Q2 GDP slightly reduces the chances that the Fed will opt for a bigger rate cut.

EUR/USD trades in a very tight range below 1.1100 in Friday’s European session, with investors focusing on the Eurozone flash Harmonized Index of Consumer Prices (HICP) for August and the United States (US) Personal Consumption Expenditure Price Index (PCE) for July, which will be published at 09:00 GMT and 12:30 GMT, respectively.

The Eurozone HICP report is expected to show that the headline inflation decelerated sharply to 2.2% from 2.6% in July due to lower energy prices. In the same period, the core HICP – which excludes volatile components like food, energy, alcohol, and tobacco – is estimated to have grown by 2.8%, slower than the former release of 2.9%.

The preliminary inflation data is expected to influence market speculation for the European Central Bank's (ECB) September interest rate cuts and, more broadly, the policy-easing path for the remainder of the year. 

Financial market participants already seem to be confident that the ECB will cut its key borrowing rates in September again. The ECB pivoted to policy-normalization in June but left interest rates unchanged in August. Market expectations for ECB September rate cuts increased sharply after data released on Thursday showed that price pressures in the Eurozone’s largest nation, Germany, returned to 2% for the first time in more than three years. Also, the economy is exposed to a technical recession as it contracted by 0.1% in the second quarter of this year and its economic outlook is vulnerable. Other Eurozone economies, such as France or Spain, have also seen a significant inflation decline in August. 

"Fading inflationary pressure combined with fading growth momentum offers an almost perfect macro backdrop for another rate cut," said Carsten Brzeski, global head of macro at ING, in a note on Thursday.

The ECB is also expected to deliver an additional interest rate cut somewhere in the last quarter of this year.

Daily digest market movers: EUR/USD trades sideways ahead of key inflation data

• EUR/USD trades with caution as the US Dollar (USD) consolidates ahead of the US PCE inflation data for July. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades slightly below a fresh weekly high of 101.58.
• Investors await the US inflation data to get fresh cues about the likely monetary policy action by the Federal Reserve (Fed) in the September meeting. The PCE report is expected to show that year-over-year core inflation rose at a slightly faster pace of 2.7% from 2.6% in June, with monthly figures growing steadily by 0.2%.
• Currently, financial markets seem to be confident that the Fed will start reducing interest rates in September. However, traders remain split over the potential size by which the Fed will pivot to policy-normalization.
• According to the CME FedWatch tool, 30-day Federal Funds Futures pricing data shows that the likelihood of a probability of 50-basis points (bps) interest rate reduction in September is 33%, while the rest are favoring a cut by 25 bps.
• The likelihood of a bigger rate cut has fallen slightly after the US Bureau of Economic Analysis (BEA) reported that the pace at which the economy grew in the second quarter was higher than previously estimated. The agency reported that the economy grew at a robust pace of 3% on an annualized basis, against the preliminary estimates of 2.8%. 

Technical Analysis: EUR/USD consolidates below 1.1100

EUR/USD trades inside Thursday’s trading range after steading below the crucial resistance of 1.1100. The near-term outlook of the major currency pair is still firm as all short-to-long-term Exponential Moving Averages (EMAs) are sloping higher. Also, the major currency pair holds the breakout of the Rising Channel formation on a daily timeframe. 

The 14-day Relative Strength Index (RSI) has declined below 60.00 after turning overbought near 75.00.

On the upside, a recent high of 1.1200 and the July 2023 high at 1.1275 will be the next stop for the Euro bulls. The downside is expected to remain cushioned near the psychological support of 1.1000.