The Euro strengthened against the U.S. dollar on Friday, concluding the week with gains after a key U.S. inflation report met expectations but remained below a critical threshold. The data has reinforced market beliefs that the Federal Reserve will lower interest rates before the end of the year, shifting investor sentiment.
The EUR/USD currency pair traded at 1.1697, marking a 0.27% increase for the day. This recovery was primarily driven by the release of the core Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve's preferred measure of inflation, which showed price pressures remain contained.
Key Takeaways
- The EUR/USD pair rose to 1.1697 as U.S. core PCE inflation held steady at 2.9% year-over-year.
- Market probability of a Federal Reserve rate cut by year-end increased from 84% to 88% following the inflation report.
- Comments from Fed officials, including Governor Michelle Bowman, pointed to a fragile labor market, adding to dovish sentiment.
- Traders are now focused on upcoming U.S. jobs data and Eurozone inflation figures for further direction.
US Inflation Data Fuels Rate Cut Speculation
The primary catalyst for the Euro's upward movement was the latest inflation data from the U.S. Bureau of Economic Analysis. The core PCE Price Index, which excludes volatile food and energy costs, rose 2.9% in August from a year earlier. This figure was unchanged from July and matched economists' forecasts.
While the headline PCE, which includes all items, increased slightly to 2.7% year-over-year from 2.6%, the core reading below 3% was the key focus for investors. This sustained moderation in underlying inflation has significantly bolstered the case for the Federal Reserve to implement monetary easing.
Market Reaction
Following the data release, the probability of a Fed interest rate reduction by the end of the year climbed to 88%, up from 84% just a day prior, according to the Prime Market Terminal's interest rate probability tool.
Adding to the economic picture, the University of Michigan’s final consumer sentiment reading for September came in weaker than anticipated at 55.1, below the expected 55.4. The report also showed a slight easing in consumer inflation expectations, which the Fed monitors closely.
Federal Reserve Officials Signal Caution
Recent commentary from Federal Reserve officials has contributed to the dovish market sentiment. Fed Governor Michelle Bowman described the labor market as "fragile" in recent remarks. She suggested that if employment conditions were to deteriorate, the central bank would need to adjust its policy at a faster pace.
"Should the conditions deteriorate, they would need to adjust policy at a faster pace," Bowman stated, highlighting the Fed's sensitivity to employment trends.
Separately, Richmond Fed President Thomas Barkin offered a more balanced but still cautious view. He noted that both inflation and unemployment are currently moving in the "wrong direction," but he believes the downside risks are limited for now.
Why the Fed Watches PCE and Jobs Data
The Federal Reserve has a dual mandate: to achieve maximum employment and maintain price stability. The core PCE index is its primary gauge for inflation, with a target of 2%. Simultaneously, key employment reports like the Nonfarm Payrolls are crucial indicators of the economy's health. Weakness in either inflation or the job market can prompt the Fed to cut interest rates to stimulate economic activity.
Eurozone Focuses on Geopolitics and Future Data
On the European side, the economic calendar was light, leaving the Euro influenced by broader market dynamics and geopolitical developments. Tensions between NATO and Russia have been a background concern for the single currency.
According to reports from Bloomberg, European officials have privately communicated to Russia their readiness to intercept Russian aircraft, viewing a recent incursion into Estonian airspace as a deliberate act. While not the primary market driver, such geopolitical risks can introduce volatility for European assets.
In other data, the European Central Bank’s Consumer Expectations Survey revealed that households anticipate inflation to be 2.8% in one year. The five-year outlook edged slightly higher to 2.2% from 2.1%, remaining just above the ECB's 2% target.
Technical Outlook and Week Ahead
From a technical standpoint, the EUR/USD pair ended the week on a stronger footing but faces a key challenge. After finding support near the 1.1650 level, the pair rallied towards 1.1700 but was unable to close the week above this significant psychological mark.
The Relative Strength Index (RSI), a momentum indicator, remains in bearish territory. This, combined with the failure to decisively break above 1.1700, suggests potential for further downside if bullish momentum does not continue.
Key levels to watch include:
- Support: The first line of support is at 1.1650, followed by 1.1600. A break below that could target the 100-day Simple Moving Average (SMA) at 1.1588.
- Resistance: If buyers manage to push the price above 1.1700, the next resistance levels are found at 1.1750 and then the 1.1800 mark.
Looking to the week ahead, traders will be closely watching a packed economic calendar. In the United States, the focus will be on the September labor market reports, including the ADP National Employment Change and the official Nonfarm Payrolls data. The ISM Manufacturing PMI and several speeches from Fed officials will also be influential.
In the Eurozone, September inflation figures will be critical, alongside business and consumer sentiment indicators. A number of European Central Bank speakers are also scheduled, whose comments could provide further clues on the future path of monetary policy in the region.
