EUR/USD has declined to approximately 1.1325 on Thursday. US PCE inflation increased at a rate below expectations in August, leading to a decrease in the anticipation of a Federal Reserve rate hike this month. ECB’s Lagarde emphasised that the central bank ought to implement a “measured response” in light of the absence of evidence indicating second-round effects. The EUR/USD pair drifts lower to around 1.1325 during the early Asian trading hours on Thursday. The US Dollar strengthens against the Euro amid an extended rise in US Treasury yields. The weekly Initial Jobless Claims report from the US and statements from Federal Reserve officials will serve as key focal points later today. The US Personal Consumption Expenditures Price Index recorded a month-over-month increase of 0.3% in August, resulting in a year-over-year gain of 3.4%, as reported by the Commerce Department’s Bureau of Economic Analysis on Wednesday. These figures were below expectations. Excluding food and energy, PCE recorded a 0.2% increase, resulting in an annual core level of 3.0%. The respective forecasts were for 0.3% and 3.3%.
According to the CME FedWatch tool, traders are pricing in a 38.2% chance of a quarter-point rate hike this month, down from 51% a day ago. Traders continue to anticipate an additional rate hike in December, even in light of the softer inflation data released on Wednesday. The scaling back of bets for a Fed rate increase in the October policy meeting prompted a slight retreat in shorter-dated US Treasury yields; however, 10- and 30-year bond yields still reached new highs overnight. Across the pond, European Central Bank President Christine Lagarde stated on Tuesday that increasing bond yields will restrain economic growth and restrict the transmission of high energy costs to inflation. She added that the central bank should adopt a “measured response as appropriate to keep inflation in check,” noting that second-round effects have so far been absent. According to TD Securities, “resilient growth and persistent inflation pressures” are likely to keep the ECB focused on “returning rates to mildly restrictive territory,” with the bank expecting the Governing Council to “deliver a final 25bp hike in December, taking the deposit rate to 2.75%.” In their view, “underlying economic data and inflation indicators remain broadly consistent with a measured tightening cycle aimed at moving policy into mildly restrictive territory.”
On the market side, TD highlights that “OIS markets are currently pricing around 31bp of ECB tightening by end-2026 and close to 100bp cumulatively by end-2027, taking the terminal rate to nearly 3.5%, well above the 2.5% neutral rate referenced by several ECB policymakers.” They stress that “neither we nor the broader consensus expect the ECB, or other major central banks, to validate the full extent of current market pricing.” Against this backdrop, TD says it “maintain[s] a bullish EURUSD year-end forecast” and has “recently expressed the view via 3m risk reversal to fade the broad-based USD rally.” Fed’s Kashkari speech scores 7.1/10 on the FXS Speechtracker, notably above the 6.2/10 historical average, underscoring a firmer hawkish tone relative to the established baseline. By emphasising that inflation persists at “still too high” levels around 3% and underscoring a robust economy characterised by strong spending and employment, the statements bolster the argument for maintaining a restrictive policy stance and even considering an elevated neutral rate. The explicit pencilling in of one more hike this year and another in 2027 indicates a readiness to prolong the tightening cycle should growth and inflation continue to exhibit strength.
The FXS Fed Sentiment Index decreased by 0.42 points to 143.28, reflecting a slight retreat in perceived hawkishness while remaining firmly entrenched in hawkish territory. With the index significantly exceeding the neutral 100 threshold, the interplay of a robust FXS Speechtracker score and Kashkari’s willingness to consider additional rate hikes sustains support for the Dollar, despite market recalibrations regarding the speed and magnitude of forthcoming tightening measures. In the daily chart, EUR/USD maintains a distinct bearish near-term bias as the spot remains below the 100-day simple moving average and the Bollinger middle band. Price is being pushed toward the lower end of the recent range, with the Bollinger lower band providing the nearest technical support, while the upper band signifies the far-off peak of the existing volatility envelope.
The Relative Strength Index (14) at 22.5 indicates a position firmly entrenched in oversold territory, suggesting that although downside pressure remains, the current sell-off may be approaching a state of exhaustion. On the downside, immediate support is situated at the Bollinger lower band near 1.1270, a level at which bears might begin to realise profits or where new buying interest could potentially surface. On the topside, initial resistance is observed at the Bollinger middle band near 1.1483, followed by the 100-day SMA at 1.1515, which represents a more significant barrier for any recovery attempt. A sustained break above these levels would be necessary to alleviate the current bearish structure, while the upper Bollinger band around 1.1700 remains a more distant objective.
