EUR/USD declines to two-week low ahead of Eurozone inflation and Fed policy

EUR/USD drops below 1.0840 ahead of crucial Eurozone/US events.
The ECB may cut interest rates two more times this year.
The Fed is expected to openly endorse rate cuts in September.

EUR/USD drops below 1.0840 in Monday’s European session as the US Dollar (USD) rises, with investors focusing on the Federal Reserve’s interest rate decision. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, jumps to near 104.50. The Fed is expected to leave interest rates unchanged in the range of 5.25%-5.50%. Therefore, investors will keenly focus on the monetary policy statement and Fed Chair Jerome Powell’s press conference to get fresh cues about rate cuts.

Market experts see the Fed communicating openly about rate cuts in the September meeting amid significant progress in inflation declining towards the bank’s target of 2% and rising risks to the labor market. Fears of inflation remaining persistent have waned as input prices have decelerated significantly in the last quarter. Flash United States (US) Q2 GDP report showed that the Price Index decelerated at a faster pace to 2.3% from the estimates of 2.6% and the prior release of 3.1%.

Also, sticky US core Personal Consumption Expenditures Price Index (PCE) data for June failed to dash expectations of Fed rate cuts in September. Monthly core PCE inflation grew at a higher pace of 0.2% from expectations and the prior release of 0.1%, with annual figures growing steadily by 2.6%.

This week, investors will also focus on a slew of economic data such as JOLTS Job Openings for June, ADP Employment Change, ISM Manufacturing Purchasing Managers Index (PMI), and Nonfarm Payrolls data for July.

Daily digest market movers: EUR/USD slumps ahead of key economic events

EUR/USD weakens to near 1.0835 in Monday’s European session. The major currency pair declines amid uncertainty ahead of the Eurozone preliminary Harmonized Index of Consumer Prices (HICP) for July and the Federal Reserve’s (Fed) monetary policy announcement on Wednesday.
The Eurozone inflation data will indicate whether market expectations for two more rate cuts by the European Central Bank (ECB) this year are appropriate. A few ECB policymakers are comfortable with speculation of two more rate cuts amid a dismal economic outlook and confidence that price pressures are on track to return to the desired rate of 2% next year. Annually, headline and core HICP, which excludes volatile items like food, energy, alcohol, and tobacco, are estimated to have decelerated to 2.3% and 2.8%, respectively.
Admitting to slower demand in the Eurozone’s largest nation, German Finance Minister Christian Lindner announced tax relief for corporations and households to spur spending and investment.
Before the Eurozone inflation data, investors will focus on the preliminary Eurozone Q2 Gross Domestic Product (GDP) and inflation data of Germany and Spain, which will be published on Tuesday.

Technical Analysis: EUR/USD falls below 1.0850

EUR/USD dips below 1.0850. The shared currency pair remains inside a Symmetrical Triangle formation on a daily timeframe after failing to hold the breakout. The major currency pair extends its downside below the 20-day Exponential Moving Average (EMA), which trades around 1.0840. The shared currency pair could slide further towards round-level supports near 1.0800 and 1.0700.

The 14-day Relative Strength Index (RSI) returns within the 40.00-60.00 range, suggesting the bullish momentum has faded.

On the upside, the round-level resistance of 1.0900 will be a key barrier for the Euro bulls.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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