EUR/USD Faces Uncertainty Ahead of Key Events: ECB Meeting and US CPI Data

Introduction

The EUR/USD pair is grappling with uncertainty as it hovers below the mid-1.0700s during the early European session on Wednesday. Investors are treading cautiously ahead of pivotal events that could significantly impact the currency pair’s direction. The EUR/USD is currently trading near 1.0745, down 0.07% on the day, as market participants await key developments on both sides of the Atlantic.

ECB’s Inflation Forecast Sparks Interest Rate Hike Speculation

Reuters reports that the European Central Bank (ECB) expects Eurozone inflation to remain above 3% next year. This forecast lends support to the argument for the ECB to announce its tenth consecutive interest rate hike during its meeting on Thursday. Expectations regarding the ECB’s interest rates have been divided among market participants, with approximately 40% of investors anticipating a rate hike at the upcoming meeting. If the unconfirmed ECB disclosure holds true, it could boost the Euro against the US Dollar, acting as a tailwind for the EUR/USD pair.

US CPI Data Looms Large

On the other side of the Atlantic, the potential upside for the EUR/USD pair may be capped as market players adopt a cautious stance ahead of the release of the US Consumer Price Index (CPI) data on Wednesday. The annual CPI rate is expected to rise from 3.2% to 3.6%, while the core CPI figure is forecasted to decrease from 4.7% to 4.4%. This data has the potential to trigger volatility in the currency pair and shape expectations regarding the Federal Reserve’s monetary policy.

USD Strength and Rate Expectations

The US Dollar (USD) may benefit from the prevailing narrative of higher interest rates in the United States. Investors are anticipating that the Federal Reserve (Fed) will keep interest rates unchanged at 5.25%-5.50% in September, with a 93% probability. Meanwhile, the market has priced in a 40.8% likelihood of a rate hike at the November meeting, according to the CME Fedwatch Tool. This suggests that the USD could find support as market participants adjust their expectations for Fed policy.

Upcoming Data Releases

As the day unfolds, investors will closely monitor Eurozone Industrial Production figures and the highly anticipated US Consumer Price Index (CPI) for August, both of which have the potential to provide fresh impetus for the EUR/USD pair. Attention will then shift to Thursday’s ECB monetary policy announcement and US Retail Sales data. These events are expected to offer further clarity on the future direction of the EUR/USD pair, as investors eagerly await the outcomes.

Conclusion

The EUR/USD pair finds itself in a state of uncertainty as it navigates key events on the horizon. The ECB’s inflation forecast has sparked speculation about an interest rate hike, while the looming US CPI data adds to the cautious sentiment. The strength of the US Dollar and expectations surrounding Fed policy are further factors to consider. As Eurozone Industrial Production, US CPI data, ECB’s monetary policy decision, and US Retail Sales take center stage in the coming days, the EUR/USD pair will likely experience notable volatility, shaping its near-term trajectory.