FX.co ★ EUR/USD. Eurozone inflation report, ECB minutes, core PCE index

The EUR/USD traded lower on Thursday, after three days of steady growth. Buyers were unable to test the 1.0950 resistance level (the lower band of the Kumo cloud on the daily chart), stopping just a few steps from the 1.0946 target. The fundamental background quickly changes every day, either strengthening or weakening the positions of EUR/USD buyers and sellers. For instance, Wednesday was clearly not in favor of the bears: the ADP report was in the "red," the U.S. Department of Commerce lowered the country's GDP growth estimate (for the second quarter), while the inflation growth report in Germany was in the "green."

The situation was reversed on Thursday. The minutes of the European Central Bank's July meeting was not on the euro's side, and the eurozone inflation report couldn't reinforce hawkish expectations regarding the ECB's next steps. Meanwhile, as expected, the core PCE index, published at the start of Thursday's US session, had increased. As a result, the EUR/USD pair turned and headed towards the 1.0850 support level (Tenkan-sen line on 1D), reclaiming the lost points.

However, despite the increased volatility, traders have not really decided on the direction of the price movement. Buyers couldn't break the downtrend, and sellers, in turn, couldn't resume it (they didn't hold positions within the 7th figure). Look at the weekly chart of EUR/USD: after a 6-week steady decline, the pair started a correction this week, but still remained within the 8th figure. Bears tried to attack the 7th figure (but failed), while bulls tried to settle within the 9th figure (also unsuccessful). Mixed fundamental signals force traders to be cautious and lock in profits when approaching key support/resistance levels.

During the European session on Thursday, the eurozone Consumer Price Index was published. Annual inflation remained unchanged at 5.3% in August, against the expectations of a decline to 5.1%. Inflation has declined after hitting its peak in October at 10.6% but the decrease has slowed in recent months. Regarding core inflation, the situation is somewhat different. The core CPI, excluding fuel and food prices, rose actively until March, marking at 5.7%. Then, the indicator started to gradually ease but got stuck in a range: in May, it was at 5.3%, in June and July - 5.5%, and finally, in August, the index returned to 5.3%.

On the one hand, such a result was on the euro's side, as it speaks of the "stubbornness" of European inflation. On the other hand, the CPI hasn't accelerated but remained at the level of previous months. This allows ECB officials to take a wait-and-see stance in September to monitor the dynamics of key indicators.

According to economists in a Reuters poll, the likelihood that the ECB will raise rates by 25 basis points in September has dropped below 40%. The disappointing PMI and IFO indices, which were published last week, played a role here.

ECB Governing Council member Isabel Schnabel also mounted pressure on the euro. She is considered a representative of the "hawkish wing" of the ECB. However, she voiced quite cautious remarks, stating that the growth of the eurozone economy "turned out to be weaker than forecasted". In her words, "we cannot trade off a need for a further tightening of monetary policy today against a promise to hold rates at a certain level for longer,".

The disclosed minutes from the ECB's July meeting did not support the euro. According to the document's text, ECB officials agreed with the bank's chief economist's conclusions that the near-term economic prospects for the eurozone had "significantly deteriorated." In addition, the officials assessed the prospects of tightening the monetary policy, suggesting that a further rate hike (in the September meeting) would be necessary only " if there was no convincing evidence that the effect of the cumulative tightening was strong."

Projecting this phrase onto the eurozone inflation report, one might cautiously deduce that the ECB might adopt a wait-and-see stance in September.

Judging by the dynamics of EUR/USD on Thursday, many market participants seem to have arrived at similar conclusions.

The US dollar, in turn, found support from the core PCE (Personal Consumption Expenditures) index. The PCE index resumed its growth after a two-month decline. In June, the indicator sharply dropped to 4.1% year-on-year (the lowest since October 2021), while in July, it settled at 4.2%. Inflation in the US, as measured by the change in PCE Price Index, rose to 3.3% on a yearly basis in July from 3% in June. The core index remained nearly at the June level, but the trend itself is crucial. Moreover, Federal Reserve Chair Jerome Powell, who spoke at the Jackson Hole symposium, also forecasted a rise in this indicator while simultaneously expressing concern about the CPI and PPI growth.

Thursday's labor market data bolstered the greenback. The indicator for the increase in initial unemployment claims has been declining for the third consecutive week, reaching a mark of 228,000 (the best result since the end of July).

Thus, the current fundamental picture for the EUR/USD pair is more "against" the euro than "for" the greenback. The core PCE index came out at the estimated level, thus offering relatively modest support to the US currency. In contrast, the euro faced significant pressure as hawkish expectations regarding the ECB's future course of actions significantly weakened.

At the moment, the EUR/USD pair is testing the support level of 1.0850 (Tenkan-sen line on the daily chart). If sellers consolidate below this target, the Ichimoku indicator will form a bearish "Parade of Lines" signal, and the price will find itself between the middle and lower lines of the Bollinger Bands on the same timeframe. The next support level would be 1.0780 (the lower Bollinger Bands line).