EUR/USD rate exposed to another rise in US core CPI

Euro rate talking points

EUR/USD trades to a new weekly low (0.9726) following a better-than-expected increase in US Non-Farm Payrolls (NFP) and US data releases such as the Consumer Price Index (CPI) may continue to weigh on the exchange rate. CPI) is expected to show sticky inflation.

Euro Basic Forecast: Carrier

After EUR/USD failed to test the 50-day SMA (0.9996), it will chart a series of lower highs and lows, and the currency may continue to decline as it seems to be tracking the negative moving average in the coming days.

As a result, EUR/USD may struggle to maintain its advance from the annual low (0.9536), evidence of a resilient labor market will allow the Federal Reserve to pursue restrictive policy, and an improvement in the US CPI may encourage the central bank. The core rate, which strips out volatile items such as food and energy prices, is expected to rise to 6.5% in September from 6.3% a month earlier, continuing its current approach to fight inflation.

Another increase in the core CPI could drag down the EUR/USD as the Federal Open Market Committee (FOMC) maintains a hawkish guidance on monetary policy, and the US dollar could continue to outperform its major peers ahead of the Fed’s next interest rate decision. Evidence of sticky inflation on November 2 fueled speculation of another 75bp Fed rate hike.

Until then, developments out of the US are likely to continue to sway EUR/USD as the European Central Bank (ECB) has shown little interest in pursuing restrictive policy and the Governing Council’s implementation of a small rate hike remains to be seen. Actions at the next meeting on October 27 at the September meeting “will lead to a transition from the above highly accommodative policy levels to levels that will ensure that inflation returns to our two percent medium-term target by then.”

That being said, the jitters in the US CPI report could keep EUR/USD under pressure, as the Fed’s Summary of Economic Forecasts (SEP) reflects a steeper path for US interest rates and the exchange rate could continue to track its negative downward spiral. When the 50-day SMA (0.9996) was reversed before the moving average.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.