The EUR/USD currency pair is now trading at a little below 1.1710. It jumped up recently to its highest valuation since July 24’s close on Tuesday. Market participants now turn their attention to the next release of the US Consumer Price Index (CPI). More importantly still, they are watching the European Central Bank’s (ECB) monetary policy decision, both on Thursday. Each of these developments is significant. They will shed light on inflation dynamics and central bank policy approaches, which will affect the euro and the dollar directly.
The forthcoming CPI report will be an important reading ahead of next week’s Federal Reserve meeting. Analysts have been watching this data with bated breath, as it’s the last big inflation checkpoint before policymakers are expected to meet. The recent August Producer Price Index (PPI) report, a key short-term inflation indicator, signals some relief from price pressures at the wholesale level. This dropped headline prices 0.1% month-over-month against forecasts of a positive 0.3% increase. Annual core PPI inflation receded, falling to 2.8% from 3.7%. This decline solidifies the narrative that inflation is on the downward path in America.
At least on the inflation dynamics front, things are looking pretty good in the Eurozone. Is the ECB really prepared to hold rates where they are at the next meeting? Most recently, it moved the deposit rate down to 2.0% after cutting rates multiple times earlier this year. Today’s weaker than expected data indicates that Eurozone inflation has fallen to 2.6% y/y, rather than the earlier forecast of 3.3%. This drop is the clearest indication yet that inflation is coming back toward the ECB’s 2% target, which will ease some pressure on policymakers.
Wage pressures across the Eurozone are similarly on the wane, a further indication of easing wage pressures impacting future monetary policy decisions. Analysts believe that ECB officials are signaling an end to the current easing cycle, suggesting that they may refrain from further rate cuts in the near future. This feeling could provide buoyancy to the euro as long-awaited stability seems to be in sight.
Markets are now looking ahead to these important economic reports, and the US Dollar Index (DXY) is ticking lower in anticipation, hovering around 97.70. Now, the dollar is on a strong though volatile run, adding to overall market uncertainty. At the same time, inflation data continues to send mixed signals, complicating the outlook for traders and investors alike.