Easing Eurozone inflation to back an ECB rate cut in September

• German inflation surprised by falling by more than anticipated in August.
• The European Central Bank will likely maintain the loosening monetary path.
• EUR/USD corrective decline may continue ahead of the weekly close.

Eurostat will publish the preliminary estimate of the August Eurozone Harmonized Index of Consumer Prices (HICP) on Friday, and the anticipated outcome will back up the case for another European Central Bank (ECB) interest rate cut when policymakers meet in September.

The ECB pulled the trigger in June, trimming the three main benchmarks by 25 basis points (bps) each, as concerns about economic progress overshadowed inflationary worries. Of course, policymakers did not attribute their decision to growth-related issues but mentioned easing price pressures.

And it is logical, given that the central bank’s goal is unrelated to economic developments. The ECB's main task is to maintain price stability by ensuring inflation remains low, stable and predictable.

Indeed, easing inflation levels have helped policymakers decide on trimming rates. At the time being, inflation is expected to reach the central bank’s 2% goal in 2026.

The HICP was confirmed at 2.6% YoY in July and is foreseen to grow by 2.2% in August, while the core annual index is expected at 2.8%, down from the previous 2.9% increase.

Ahead of the announcement, a positive surprise came from Germany. The country released the preliminary estimates of the August inflation data, which surprised by falling by more than anticipated. The Consumer Price Index (CPI) rose 1.9% YoY, below the 2.1% predicted, while the CPI was down 0.1% compared to the previous month. The broader Harmonized Index of Consumer Prices (HICP) increased by 2.0% in the year to August and fell by 0.2% compared to July.

When will the HICP report be released, and how could it affect EUR/USD?

The Eurozone August preliminary HICP is scheduled to be released at 09:00 GMT on Friday, and given the recently published German figures, there is a good chance inflation will result below expected. In such a scenario, and through speculation the ECB could accelerate its loosening monetary path, the Euro can edge further lower. Still, and as market participants are also anticipating an interest rate cut from the Federal Reserve (Fed), both currencies could remain evenly pressured, resulting in little action around EUR/USD.

From a technical point of view, the EUR/USD pair has room to extend its slump. After flirting with the 1.1200 level, the pair is currently below the 1.1100 mark and without technical signs of changing course.

From a broader perspective, however, the slump seems corrective. In the daily chart, the pair is sharply down for a second consecutive day but still developing above a firmly bullish 20 Simple Moving Average (SMA), which provides dynamic support in the 1.1020 area. Furthermore, the 100 and 200 SMAs maintain modest bullish slopes far below the shorter one. Finally, technical indicators have corrected overbought conditions and maintain their downward slopes, but they still hold within positive levels.

EUR/USD needs to recover above 1.1140 to negate another leg lower and have the chance of retesting the 1.1200 price zone.

A break below 1.1020, on the other hand, may result in a slide towards the 1.0940-1.0960 area ahead of the weekly close.