EUR/USD Faces Downside Pressure as USD Strengthens Amid ECB and US Data

The EUR/USD pair struggled to sustain its recovery as it faced resistance following comments from ECB President Christine Lagarde. Friday’s rebound encountered downward pressure as the US Dollar (USD) maintained its strength, pushing the broad dollar index higher.

ECB’s Dovish Rate Hike Stifles Euro

The European Central Bank (ECB) surprised markets with a dovish rate decision, raising its benchmark interest rates by 25 basis points, bringing the overnight deposit rate to 4%. However, despite the rate hike, the Euro (EUR) faced a slump as the ECB effectively signaled the end of the current rate hike cycle without explicitly stating it.

ECB President Christine Lagarde’s remarks added to the Euro’s woes, as she indicated that the ECB was now focused on determining how long rates should remain at current levels rather than how much they should change. This shift in tone eroded expectations of further rate hikes from the ECB, and investors are now anticipating the possibility of the European Union’s central bank cutting rates in March of the next year.

On the US side, the economic calendar provided support for the Greenback (USD) as US data continued to outperform expectations.

US retail sales figures for August exceeded forecasts, registering a 0.6% increase compared to the anticipated 0.2%. This figure also marked an improvement over the upwardly revised previous reading of 0.5%. The US economy appears robust and resilient, dispelling concerns of an impending recession. The recent narrative of a “soft landing” in the US economy, which had been weighing on the markets, now seems to be fading as the US consumer segment shows strength.

EU Inflation and US FOMC in Focus for the Coming Week

The upcoming week holds key events for both the European Union and the United States. On Tuesday, EU inflation figures, as measured by the Harmonized Index of Consumer Prices (CPI) for August, are set to be released. Forecasts suggest that the CPI will remain in line with the previous period. The last reported pan-European inflation rate stood at 0.3%, and investors expect a similar reading this time. Lingering concerns about inflation make any significant beat on the headline figure a potential trigger for risk aversion.

Meanwhile, in the US, all eyes will be on the Federal Reserve (Fed) once again, with the Fed’s Federal Open Market Committee widely expected to keep the US benchmark interest rate unchanged at 5.5%. However, inflation concerns are still prevalent in the markets, keeping investors on edge about the possibility of further rate hikes by year-end.

Thursday will also bring US jobless claims data, and Friday will feature preliminary EU manufacturing and services Purchasing Manager Indexes (PMI), followed by their US counterparts later in the day. These data releases will likely influence market sentiment and trading decisions in the week ahead.