Due to the EUR/USD’s failure to surpass the 1.1900 opposition last week, the pair reversed course and retested the 1.1800 assistance. With the lady opposing trimming at the European Central Bank, OCBC Bank analysts prefer to remain bearish on the unit, with a preference for it to revert to the 1.1700 mark. The ECB’s message has become more dovish as a result of Lagarde’s “taper-but-not-taper” language, correcting the less-dovish tendency observed in late August/early September. There is a good chance that the pro-euro bets will flip, which will put more pressure on the Euro. The technical picture has also deteriorated following the break of the 55-day moving average (1.1806). At 1.1700, focus again.
EUR/USD CHART. Source: Tradingview.com
Francois Villeroy de Galhau, a member of the Governing Council of ECB, stated in interviews that the current rise in inflation is only a transitory phenomenon. Villeroy said that the ECB is maintaining close tabs on any additional increases in price pressure. The remarks did not affect the shared currency or the EUR/USD pair, which stays at the whim of the US currency’s competitive landscape before the critical US CPI release.
US Inflation Forecast Centered on CPI
Last month’s Consumer Price Index (CPI) data serves as a preceding indication of inflation. The Fed is uncertain to declare impending trimming in its September decision, given Nonfarm Payrolls dropped significantly last month, adding only 235,000 jobs. Nevertheless, CPI statistics will influence the signals given by Federal Reserve Head Jerome Powell in the run-up to the next meeting.
In contrast to price indexes like the CPI, the Fed pays attention to Core CPI; this includes prices for non-volatile goods, and this is the measure that is projected to fall from the spikes for the second consecutive month. A decrease to 4.2 percent is expected, following an increase from 4.5 percent in June to 4.3 percent in July. This is better than the bank’s 2% objective.
Possible Market Reactions
Core CPI figures of 4.2 percent, 4.3 percent last time, or 4.1 percent or 4.4 percent might be regarded within estimations. In certain instances, the pressures building up to the event will almost certainly be vented, resulting in turbulent and disorientated trading. However, as the hype dies down, the dollar’s recent gains are likely to be extended. Any indication that core rates are refusing to fall indicates a greater likelihood of a premature trimming declaration.
An inflationary pressure of 4% or less on an annualized basis might already be regarded as a big adverse shock. It would be a triumph for Team Transitory, reiterating Chair Powell’s stance on temporary price increases. This would also suggest that the Fed would resist signaling at quick downsizing next week, but will keep the door open for it in the subsequent meeting. In this situation, the Dollar is expected to see a short squeeze, collapsing and erasing a sizable portion of September’s gains.
Returning to yearly core inflation of 4.5 percent in August, far after the spring restart, would indicate sustained inflation. Team Transitory would face a setback in this scenario, and doves at the Fed, such as Powell, would reconsider their beliefs. The increasing likelihood of commencing trimming before the year’s end would boost the Dollar, prolonging its rise. Stocks would be harmed.
The Core CPI statistic for August is crucial for both the economy and the markets. A reading within expectations would maintain the dollar’s bid, while a reading of 4.5 percent or higher would spark gains, while a reading of 4 percent or below would reverse recent gains.