EUR/USD Analysis: ECB Minutes and Inflation Figures to Drive Euro

Highlights

• EUR/USD gained 0.40% on Wednesday. Following a 0.56% rise on Tuesday, the EUR/USD ended the session at $1.09231.
• Eurozone inflation figures and ECB monetary policy meeting minutes to influence the September ECB rate hike decision.
• A rise in the Core PCE Price Index and personal spending could lead to a more hawkish Fed stance.

Wednesday Overview

The EUR/USD gained 0.40% on Wednesday. Following a 0.56% rise on Tuesday, the EUR/USD ended the day at $1.09231. The EUR/USD fell to a low of $1.08551 before rising to a high of $1.09454.

Eurozone Inflation and ECB Minutes to Cement a September Hike

This morning, German retail sales and unemployment figures will draw interest. However, we expect the numbers to have a limited lasting impact on the EUR/USD. The German GfK Consumer Climate Survey revealed negative sentiment toward income, the economy, and unemployment. A steady unemployment rate and a modest rise in retail sales are unlikely to shift investor sentiment toward the German economy.

However, Eurozone inflation figures will move the dial. The markets are betting on a September ECB interest rate hike. German inflation numbers from Wednesday softened but not enough to take pressure off the ECB.

Sticky Eurozone inflation figures would likely ensure a September ECB rate hike. Economists forecast the annual core inflation rate to soften from 5.5% to 5.3% and the inflation rate to ease from 5.3% to 5.1%.

Later in the session, the ECB monetary policy meeting minutes also need consideration. However, the minutes are unlikely to reveal any surprises with the ECB committed to taming inflation.

With inflation in focus, investors should monitor ECB Executive Board member commentary throughout the session. ECB Executive Board members Isabel Schnabel and Luis de Guindos are on the calendar to speak today.

US Personal Income and Outlays Report to Test the Theory of a Pause

US Core PCE Price Index and personal income figures for July will move the dial. Weaker-than-expected labor market numbers have eased bets on further Fed rate hikes. However, a pickup in spending and a more marked increase in the Core PCE Price Index could refuel bets on a more hawkish Fed.

Economists forecast the Core PCE Price Index to rise by 4.2% year-over-year in July versus 4.1% in June. Economists expect a pickup in personal spending, up 0.6% in July versus 0.5% in June.

An upward trend in personal spending fuels demand-driven inflationary pressure. The Fed would need to lift rates higher to impact disposable incomes and curb spending.

Better-than-expected US numbers would give the dollar the upper hand. While the ECB looks set for a September rate hike, the economic outlook for the euro area looks precarious. In contrast, the US economy remains resilient.

EUR/USD Price Action

Daily Chart

On Wednesday, the EUR/USD broke out from the upper level of the $1.0850 – $1.0900 resistance band. However, recessionary jitters left the EUR/USD below the 50-day EMA. Hotter-than-expected Eurozone inflation and weaker US stats would support a breakout from the 50-day EMA to target $1.10.

In contrast, a Eurozone annual inflation rate below 5% would bring sub-$1.0850 and the 200-day EMA into view.

Considering the 14-Daily RSI at 50.66, investors are sitting on the fence. With the markets betting on a Fed pause, it may come down to the US stats to drag the EUR/USD through the $1.0900 – $1.0850 support band.

4-Hourly Chart

The EUR/USD holds above the $1.0850 – $1.0900 support band this morning. Investor caution ahead of a busy euro area and US economic calendar left the 200-day EMA to cap the upside.

Hotter-than-expected Eurozone core inflation numbers would bring $1.10 and the $1.1015 – $1.1060 resistance band into view. However, bets on Fed monetary policy could shift today.

A larger-than-expected rise in the Core PCE Price Index could reignite bets on a September Fed rate hike. Hawkish sentiment would bring the $1.0900 – $1.0850 support band into play.

With hawkish ECB bets returning the EUR/USD to $1.09, the 14-4H RSI at 64.97 gives the EUR/USD room to target $1.10 before entering the overbought territory.