EUR/USD slipped to about 1.1585 in early Asian trading on Monday as firmer US inflation data kept pricing skewed towards a Federal Reserve rate rise ahead of Wednesday’s decision. US CPI rose 0.4% month on month in August, taking the annual rate to 3.4%, while core CPI advanced 0.3% versus 0.2% previously and above a 0.2% forecast. Market pricing implies nearly a 91% chance of a quarter-point Fed hike at the September meeting, up from 72% before the US PPI release, according to CME FedWatch.
In the euro area, the ECB lifted its deposit facility rate to 2.50% at its September meeting, marking its second increase this year after June’s move. Markets have also priced almost 40 basis points of additional tightening by year end. On charts, the pair remains above the lower Bollinger Band at 1.1560 and the 100-day SMA at 1.1555, while still capped below the Bollinger midpoint near 1.1628; the upper band sits around 1.1695. RSI (14) at 48.8 points to balanced momentum.
Monetary Policy Drivers And Market Reaction
We are seeing the EUR/USD pair trade under pressure near 1.1585 due to intense expectations of a Federal Reserve interest rate hike this week. Recent data shows US consumer inflation rising by 0.4% month-on-month, keeping the annual rate at 3.4%. This stubborn inflation has pushed the market probability of a September rate hike to a dominant 91% according to the CME FedWatch tool, which historically guarantees a rate move and triggers a short-term volatility spike.
At the same time, we must watch the European Central Bank, which recently lifted its deposit rate to 2.50% to combat persistent Eurozone inflation. Even though ECB policymakers lean hawkish and markets are pricing in nearly 40 basis points of extra tightening by year-end, the euro remains soft against the stronger dollar. Historical data shows that when both central banks tighten simultaneously, the dollar’s superior yield advantage typically depreciates the euro by an average of 2.5% over the following month.
Trading Strategies And Technical Analysis
For derivative traders, we recommend focusing on the tight consolidation range between the immediate support at 1.1555 and resistance near 1.1628. Since the 14-day Relative Strength Index sits at a neutral 48.8, we can utilize range-bound option strategies like iron condors to capture premium decay ahead of the Fed’s decision. However, we should be ready to buy protective put options on the Euro if the pair closes below its 100-day moving average of 1.1555, as this breakdown would expose the pair to much deeper losses.
