EUR/USD tumbles as Eurozone HICP softens, US Dollar recovers

01 Oct 2024, 10:08 by Sagar Dua · FXStreet

EUR/USD faces selling pressure as flash Eurozone annual headline HICP came in lower at 1.8% than estimates of 1.9% in September.
The ECB is highly expected to cut interest rates again in October.
Investors await the US labor market data for fresh interest rate guidance.

EUR/USD remains under pressure as the US Dollar (USD) bounces back after traders pare Federal Reserve (Fed) large rate cut bets for November. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, jumps above 101.00. According to the CME FedWatch tool, 30-day Federal Fund futures pricing data shows that the likelihood of the Fed reducing interest rates by 50 bps in November waned to 35.3% from 58% a week ago.

Market speculation for Fed outsize interest rate cuts eased after Fed Chair Jerome Powell's comments at the National Association for Business Economics conference on Monday, which indicated that the central bank will reduce key rates by quarter-to-a-percentage in both meetings remaining this year. Powell said, "If the economy evolves as expected, that would be two more cuts by year's end, for a total reduction of half a percentage point more", Reuters reported.

On the contrary, Atlanta Fed Bank President Raphael Bostic backed a second straight interest rate cut by 50 bps if the labor market data weakens unexpectedly. For fresh insights about the current labor market health, investors will focus on the United States (US) ADP Employment Change and the Nonfarm Payrolls (NFP) data for September, which will be published on Wednesday and Friday, respectively.

In Tuesday’s New York session, the US Dollar will be influenced by the US ISM Manufacturing Purchasing Managers Index (PMI) for September and the JOLTS Job Openings data for August, which will be published at 14:00 GMT.

Daily digest market movers: EUR/USD weakens as as soft Eurozone HICP spurts ECB rate cut bets

EUR/USD slides below the round-level support of 1.1100 in Tuesday’s European session. The major currency pair weakens due to further deceleration in the preliminary annual Eurozone headline Harmonized Index of Consumer Prices (HICP) below the European Central Bank’s (ECB) target of 2%, which has boosted market speculation for the ECB cutting interest rates again in October.
The report showed that the annual headline HICP inflation decelerated at a faster-than-expected pace to 1.8% from the estimates of 1.9% and August's reading of 2.2%. The core HICP – which excludes volatile items such as food, energy, alcohol, and tobacco – rose by 2.7%, slower than expectations and the August reading of 2.8%. Monthly headline HICP deflated by 0.1% in September, while the core HICP grew at a similar pace.
The ECB delivered the second interest rate cut of its current policy-easing cycle in September and is expected to cut again in October. The return of the annual HICP below 2% is not the sole reason for an increase in the ECB rate cut bets. The Old Continent is underperforming on various parameters, such as the labor market and overall economic activity. Therefore, more rate cuts are needed for the economic revival.
On Monday, ECB President Christine Lagarde acknowledged, “Some survey indicators suggest that the recovery is facing headwinds,” at the European Union parliamentary hearing in Brussels. "The latest developments strengthen our confidence that inflation will return to target in a timely manner," and "we will take that into account in our next monetary policy meeting in October," she added.

Technical Analysis: EUR/USD slides below 1.1100

EUR/USD drops sharply to near 1.1100 after failing to recapture the key resistance of 1.1200 on Monday. The major currency pair drops slightly below the upward-sloping 20-day Exponential Moving Average (EMA) near 1.1110, suggesting that the near-term outlook has become uncertain.

The long-term outlook of the shared currency pair remains firm till it holds the breakout of the Rising Channel chart pattern formed on a daily time frame near the psychological support of 1.1000.

The 14-day Relative Strength Index (RSI) edges lower below 60.00, suggesting momentum is weakening.

Looking up, a decisive break above the round-level resistance of 1.1200 will result in further appreciation toward the July 2023 high of 1.1276. On the downside, the psychological level of 1.1000 and the July 17 high near 1.0950 will be major support zones.

Economic Indicator

Harmonized Index of Consumer Prices (YoY)

The Harmonized Index of Consumer Prices (HICP) measures changes in the prices of a representative basket of goods and services in the European Monetary Union. The HICP, released by Eurostat on a monthly basis, is harmonized because the same methodology is used across all member states and their contribution is weighted. The YoY reading compares prices in the reference month to a year earlier. Generally, a high reading is seen as bullish for the Euro (EUR), while a low reading is seen as bearish.