By the end of last week, the EUR/USD pair consolidated within the 1.09 range but could not test the support level of 1.0930 (the lower boundary of the Kumo cloud on the D1 time frame). Breaking through this price barrier will allow EUR/USD sellers to target the 1.08 range, with the first goal being 1.0850 (the upper boundary of the Kumo cloud on the weekly chart). The current fundamental backdrop generally supports a further price drop, but the development of the downward trend hinges on U.S. inflation data, the September value of which we will learn at the end of next week.
Over the previous two weeks, the EUR/USD pair traded in a wide price range of 1.1080-1.1190. Buyers attempted to push into the 1.12 range, while sellers aimed to settle within the 1.10 range. However, both buyers and sellers returned to the price range empty-handed.
The dollar's key factor was the Nonfarm Payrolls report, which showed a decrease in unemployment, an increase in employment, and faster wage growth. This report ended discussions on whether the Federal Reserve would lower interest rates by 25 or 50 basis points. The likelihood of a 50-point rate cut dropped to zero, while the probability of a 25-point cut rose to 97%. Additionally, the market now considers a 3% chance that the Fed might not cut the rate at its next meeting.
Thanks to the Nonfarm Payrolls, EUR/USD sellers managed to shift to a lower price level and consolidate within the 1.09 range. If the upcoming inflation data also supports the dollar, we could see a trend reversal after three months of growth (from 1.0710 in early July to a target of 1.1215 in September).
The most significant macroeconomic report of the week will be released on Thursday, October 10. According to preliminary forecasts, September's overall Consumer Price Index (CPI) is expected to slow to 2.3% year-on-year. The index has declined for the past five months, and September should mark the sixth consecutive drop. A "2.3%" result would be the lowest since February 2021. The Core CPI, which excludes food and energy prices, is also expected to show a downward trend, falling to 3.1% year-on-year. For the past two months (July and August), the Core CPI has been at 3.2%, but it is expected to decrease in September. If the indicator comes in at the forecasted level, it will hit a multi-month (or rather, multi-year) low, reaching its lowest point since March 2021.
The next day, on October 11, the U.S. will release the Producer Price Index (PPI) for September, which is also expected to show a downward trend. The overall PPI is forecasted to be 1.3% year-on-year, marking the weakest growth rate since January. The index has been declining for the past two months. The Core PPI is expected to come in at 2.0%, down from 2.4% in August. The forecasted result would be the weakest since January.
Most experts are confident that the September CPI and PPI will reflect a further slowing of inflation in the U.S. Does this mean that the 50-basis-point scenario for the November meeting will be back on the agenda? In my opinion, no. In that case, the probability of a 25-basis-point rate cut in November will rise to 100%, but the market is unlikely to return to discussing more aggressive scenarios. Many Fed members, before the release of the Nonfarm Payrolls, considered aggressive monetary easing in the event of a "cooling" labor market. However, the 250,000 increase in jobs in September has neutralized those concerns, so the Fed can proceed gradually without sharp 50-basis-point moves. Moreover, some members of the U.S. central bank are directly opposed to aggressive rate cuts (for example, Michelle Bowman, who in September voted for a 25-point cut rather than a 50-point one).
However, if the pace of inflation decline slows down (especially if inflation starts to accelerate again), different processes will be triggered. The 3% chance of maintaining the status quo in November could expand to 10-20%. The market will begin to consider this scenario, which alone will be enough to provide additional support for the dollar. Therefore, if the data on the CPI and PPI show "green" results, we may witness another dollar rally.
For the EUR/USD pair, this would mean that the pair will break through the support level at 1.0930 and attempt to settle within the 1.08 range. If inflation predictably decreases (or comes in "red"), a corrective pullback is likely (the resistance level is at 1.1030, which is the middle line of the Bollinger Bands on the H4 timeframe), but the pair will remain under pressure. In other words, any corrective upward moves should be used to enter sell positions.
Of course, the economic calendar for the upcoming week includes more than just inflation reports. For example, on Monday, speeches are expected from members of the Fed (Michelle Bowman and Neel Kashkari) and the European Central Bank (Philip Lane and Piero Cipollone). On Tuesday, we will hear positions from Adriana Kugler, Raphael Bostic, Susan Collins, Alberto Musalem (Fed), and Joachim Nagel (ECB). On Wednesday, the minutes from the Fed's September meeting will be published, and several Fed representatives (Philip Jefferson, Lorie Logan, Austan Goolsbee, Thomas Barkin) will also give speeches. Aside from the U.S. CPI, the minutes from the ECB's September meeting and the weekly report on initial jobless claims will be released on Thursday. Mary Daly and John Williams (Fed) speeches are also expected on Thursday. The University of Michigan's Consumer Sentiment Index and the PPI will be published on Friday.
However, all these events will remain overshadowed by the inflation reports, which will have the most substantial impact on the U.S. dollar and, consequently, on all major dollar pairs.
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