The EUR/USD has retreated from its yearly highs above 1.1750, dropping below 1.1700. This move occurs despite anticipation of a Fed rate cut at the September meeting, driven by mixed US inflation data and American consumer optimism. Currently, the pair trades at 1.1695.
Economic data is pivotal following reduced Middle East tensions and a new China-US commercial deal. The US Bureau of Economic Analysis reported that the headline PCE matched estimates, while the core PCE, the Fed’s preferred inflation measure, increased faster than expected. The European Central Bank’s Klas Knot foresees at least one more interest rate cut for 2025.
Inflation Dynamics and Market Impact
Eurozone data shows a fall in France’s inflation, while Spain’s HICP surpassed the ECB’s target. The US Dollar Index has edged up, affecting the EUR/USD movements, as the dollar recovers from low points. The core PCE rose by 2.7% YoY, above the expected 2.6%, while US consumer sentiment saw a slight improvement.
Money markets expect 59 basis points of easing by year-end. The EUR/USD uptrend could continue toward 1.1800, though there is potential for a pullback given recent overbought conditions. Conversely, a drop below 1.1700 would find support at 1.1653, with further support around 1.1600.
Given the current pullback in the EUR/USD from its recent highs above 1.1750, it’s worth considering how the divergence in inflation dynamics and central bank positioning might play out over the near term. The move below 1.1700 suggests that while the broader market continues to price in some degree of US rate cut by September, short-term price action is now being dominated by other forces.
The recent Personal Consumption Expenditures (PCE) data from the US shows that while the main metric aligned with forecasts, the underlying figure – core PCE – unexpectedly pushed higher. This matters because it’s the Federal Reserve’s preferred measure of inflation. In a market that has been continuously pricing in looser policy, surprise strength in this gauge may challenge that assumption. It introduces the possibility of fewer or later cuts than what markets have priced in. That’s seen clearly in how the US Dollar Index has pulled up from previous lows, nudging the pair downward.
On the European side, Knot’s suggestion of future policy easing in 2025 is timely, though perhaps a touch premature given disparities across member states. France appears to be registering cooler price growth, yet Spain’s inflation – measured via the Harmonised Index of Consumer Prices – remains above the European Central Bank’s objective. This regional divergence complicates future expectations for ECB action. Traders would do well to avoid anchoring expectations on any single member economy, even one as large as France.
Future Expectations and Trading Setups
We’ve also seen moderate gains in US consumer sentiment, which was previously stagnating. While this on its own may not shift monetary policy, it lends support to the broader resilience of the US consumer, which strengthens the dollar indirectly through improved growth prospects.
Expectations for 59 basis points of cuts by year-end imply two to three reductions before January. If future inflation prints continue exceeding forecasts—even marginally—markets will probably begin scaling back those projections. For positioning, this would put downside pressure on EUR/USD, even as overbought signals continue flashing from the recent bull run.
For short-term setups, we are watching the 1.1653 level. A weekly close below there could invite another test of 1.1600, which has behaved as a medium-term base since early spring. However, if EUR/USD holds steady or begins trading above 1.1720 again, we can anticipate renewed buying momentum targeting recent highs. There’s little in the way of hard resistance until 1.1800, so a break higher could unfold abruptly if dollar softness resumes or if eurozone data surprises positively.
The dislocation between headline data and core measures should remain a preoccupation. Benefit now lies in selective positioning, especially where short-term pullbacks meet medium-term support. Watching real yields, particularly in the US, will be important for gauging if the current dollar recovery has staying power. There’s no evidence yet of a lasting reversal: this still looks like correction rather than trend change. Nonetheless, more mixed data prints like those we’ve just had can dampen the runway for EUR bulls.
