EUR/USD Price Analysis – Aug 31, 2023

Daily Price Outlook

Despite renewed expectations of more interest rate hikes by the European Central Bank (ECB), the EUR/USD currency pair struggled to extend its previous upward momentum, experiencing a loss of around 0.54% on the day and trading around 1.0865. However, this reversal can be attributed to mixed Eurozone inflation data, which contributed to the decline of the currency pair. Meanwhile, the US Dollar is making a recovery, leading the USD Index (DXY) to bounce back from its recent two-week low around 103.00 and test the 103.50 level. This resurgence of the Greenback is considered a significant factor that has been putting pressure on the EUR/USD currency pair.

Eurozone Inflation Data and its Impact on EUR/USD

According to data released by Eurostat, the annual Eurozone Harmonised Index of Consumer Prices (HICP) remained steady at 5.3% in August, matching the July figure and surpassing the anticipated 5.1% growth. However, Core HICP inflation slightly declined to 5.3% year-on-year in August from July's 5.5%, aligning with market expectations.

On a monthly basis, the HICP for the Eurozone increased by 0.6% in August, a notable shift from the 0.1% drop in July and better than the expected -0.1%. Core HICP inflation also rebounded to 0.3% during this period, in contrast to the expected 0.3% decrease and July's -0.1% figure. It's crucial to note that the European Central Bank's inflation target is 2.0%.

These HICP numbers significantly impact market expectations for the ECB's interest rate policy. Markets are estimating a 30% chance of a 25 basis point ECB rate hike to 4.0% in September. Due to this mixed Eurozone inflation data, the Euro is facing downward pressure, with EUR/USD trading at 1.0865, down 0.54% on the day.

Impact of Core PCE Price Index Release on EUR/USD Pair

At the US front, the Bureau of Economic Analysis (BEA) is set to release the Core Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve's preferred inflation gauge, on August 31 at 12:30 GMT. Forecasts suggest a 0.2% monthly increase in July, matching June's figures, while the annual Core PCE Price Index is expected to rise slightly to 4.2% from June's 4.1%. Meanwhile, the headline PCE Price Index is anticipated to grow 0.2% on a monthly basis, with the annual PCE figure expected to rise to 3.3%.

Hence, the Core PCE Price Index's impact on EUR/USD depends on the data. If it's higher than expected, the USD may strengthen, pressuring EUR/USD down. Conversely, a weaker figure could weaken the USD and offer support to EUR/USD. However, market reactions could be short-lived as investors await the crucial August jobs report later in the week.

EUR/USD - Technical analysis

The EUR/USD pair demonstrated significant upward momentum in the previous session, successfully breaching the 1.0880 level and advancing towards the 1.0955 threshold. This movement indicated an endeavor to regain ground in the upcoming trading sessions. However, the influence of stochastic negativity is currently introducing a certain bearish inclination.

Given this situation, the conflicting technical indicators prompt us to adopt a neutral stance until clearer signals emerge regarding the next directional movement. These signals could manifest through either a breach of the 1.0955 level or a breakdown below the 1.0880 support. It's important to note that a continuation of the ascent beyond this resistance could drive the price towards 1.1030 as the subsequent favorable target. Conversely, a breach of the support holds the potential to reignite the primary bearish trend, with the next target positioned at 1.0785.

Anticipated trading activities for today are expected to transpire within the range of support at 1.0830 and resistance at 1.1010.