EURUSD Tests 1.10 Following US CPI, EU GDP

US inflation was largely in line with expectations that would support interest rate cuts, with European GDP at expansion boosting EURUSD pasty 1.10.

Within Forecasts, Mostly

Headline and core US inflation slowed in July as widely anticipated, but "supercore" inflation came in higher than projected and also rose from the prior month. "Supercore" inflation was +0.2% in July, contrary to -0.05% in June, which was its first positive figure since Q1.​ The outcome created mixed signals, with treasury yields initially spiking but stabilising after detailed analysis. While markets still foresee a September rate decrease, the data substantially altered views on the scale of forthcoming adjustments.

US headline inflation declined to 2.9%, its lowest since March 2021, matching hopes it would stay at 3%. The closely watched core rate was slightly higher but also under projections at 3.2% versus forecasts of no change at 3.3%.

Recently, investor focus has involved shelter's influence on inflation, as housing costs drove trends. However, removing this element showed unexpected strength in monthly services price growth, garnering attention after the Fed remarks on services' resilience.

The Market Reaction

The market repriced its expectations around the Fed's rate-cutting path, contributing to an initial rise in yields while gold slid 1%. This reaction offset some of the move from the previous day in response to slower PPI growth, suggesting inflation was easing slightly faster than anticipated.

Shifting sentiment convinced markets that the Fed will implement three rate cuts this year. Previously, the market was pricing in a scenario where the Fed would likely cut rates by fifty basis points at its September meeting. Following the inflation figures, the market now sees a 63% chance of a 25 basis point cut in September, with most expecting a 50 basis point cut in November. While markets debate the exact timing of the Fed's rate reductions, the consensus around rate cuts is that the FOMC will pursue aggressive easing in the final quarter.​

Meanwhile, the second estimate of Eurozone GDP affirmed growth of 0.3% in the second quarter. The euro experienced gains against the US dollar in the wake of Tuesday's US PPI figures and now trades above 1.10 to a fresh 2024 high.

Post-Triangle Price Action

The triangle pattern seen in the EURUSD pair and subsequent price increase indicates a long-term movement towards 1.16 or higher. However, as prices currently remain under 1.1142, breaking through resistance levels of 1.12 and 1.13 appears unlikely for EURUSD. 1.09 continues to provide important support in the event of a change in direction, yet only a break below 1.08 would significantly impact the overall market sentiment.​

Source: SpreadEx

Key Takeaways

US inflation data showed mixed signals, supporting interest rate cuts but creating some doubt around the pace of easing due to higher-than-expected "supercore" inflation. Yields initially rose on the inflation figures but stabilised after detailed analysis. The data saw market reprice expectations to a 25 basis point cut in September with a 63% probability, and most now expect a larger cut in November as consensus around FOMC suggests it will pursue a more aggressive easing path in the final quarter for the year.