On Friday in European trading, the euro (EUR) was hovering around 1.1550, showing a slight increase of 0.17% against the US dollar (USD). The rise in the euro, along with major currency pairs, reflects strong expectations that the European Central Bank (ECB) will raise interest rates during its upcoming September policy meeting.
A poll conducted by Reuters indicated that out of 69 economists, 57 expect a deposit rate increase of 25 basis points (bp), bringing it to 2.50% in September.
Market analysts also seem assured that the ECB will tighten its monetary policy in September to tackle rising inflation.
ECB likely to resume rate hikes as other central banks face tough choices
HSBC analysts emphasized the growing divergence in global policy approaches, stating, “We anticipate that the ECB will raise rates again in September, which will pose a greater challenge for other major central banks.” They pointed out the ECB’s readiness to tighten policies compared to a more cautious outlook held by policymakers outside the eurozone, where inflation risks are being weighed against the necessity of maintaining current policies.
In a related note, traders are also anticipating a potential interest rate hike from the Federal Reserve in September, which has influenced the dollar’s performance.
Probability of Fed rate hike declines as soft inflation data prompts dovish price changes
Analysts at Deutsche Bank observed a significant dovish shift in expectations regarding the Fed, attributed to decreasing inflation. They noted that the likelihood of a September rate hike dropped from over 50% following Wednesday’s CPI release to approximately 35% by day’s end. They also remarked that “the unexpected Producer Price Index (PPI) data immediately impacted expectations concerning the next Fed meeting,” highlighting the decline from a 40% probability just before the announcement to 35% by the close.
EUR/USD technical analysis
The EUR/USD pair is trading close to 1.1550, facing a downtrend line near 1.1540 but is restricted by the 100-day simple moving average (SMA) at 1.1567.
While the relative strength index (14) around 60 indicates a solid bullish momentum, this positive sentiment hasn’t quite managed to surpass the overhead SMA, which continues to act as a resistance level.
On the downside, initial support is situated around the previous trendline breakpoint at 1.1510. This area, where the market previously broke through descending resistance, is now acting as a structural downside. Conversely, the 100-day SMA at 1.1567 represents the first resistance barrier, and a solid close above this level would be necessary to ease the current bearish outlook and potentially foster a more sustained recovery. Looking above, a key level to watch for the pair is the round number of 1.1600.
