EUR/USD is trading cautiously near 1.1000 ahead of ECB policy decision

• EUR/USD shows uncertainty near 1.1000 ahead of ECB policy decision.
• The ECB is expected to cut the deposit facility rate by 25 bp to 3.5%.
• The persistent US inflation data bolsters the outlook for a 25 basis point Fed rate cut for next week’s policy meeting.

EUR/USD is struggling near a three-week low around 1.1000 in Thursday’s European session. The main currency pair remains on tenterhooks, with investors focused on the European Central Bank’s interest rate decision due at 12:15 GMT. The ECB is expected to cut the deposit rate by 25 basis points (bps) to 3.5%.

This will be the ECB’s second rate cut in its current policy easing cycle, which it began in June after gaining confidence that inflationary pressures in the euro zone would return to the central bank’s 2% target in 2025 .The ECB has left its key. lending rates held steady in July as officials appeared concerned that an aggressive monetary stance could renew price pressures.

Market speculation for an interest rate cut by the ECB strengthened on Thursday as pressures on prices in the eurozone eased sharply and growing risks to economic growth in Germany, the continent’s largest nation. Germany’s economy contracted by 0.1% in the second quarter of the year and is exposed to a recession due to a weak demand environment.

With the ECB almost certain to cut interest rates again on Thursday, investors will be paying close attention to clues about the path of interest rate cuts. “The ECB is unlikely to provide enough information through forward guidance or new economic forecasts to justify another rate cut in October,” “Our view remains 25bp rate cuts today and December 12,” said Chris Turner, analyst at ING.

Daily market reasons: EUR/USD remains on the back foot as US dollar posts new weekly high

• EUR/USD remains under pressure as the US dollar (USD) refreshes its weekly high during European trading hours on Thursday. The US dollar index (DXY), which tracks the greenback against six major currencies, is rising to near 101.80. The greenback is gaining further as signs of firming in the United States (US) consumer price index (CPI) data for August forced traders to cut back bets that the Federal Reserve (Fed) will start tapering in aggressively interest rates this month.
• CPI data on Wednesday showed that annual core inflation – which excludes volatile food and energy prices – rose 3.2%, in line with expectations. Monthly core CPI rose 0.3 percent, faster than estimates and the previous release of 0.2 percent. However, the annual CPI rose 2.5%, slower than the 2.6% expected and July’s print of 2.9% due to lower energy prices. Historically, Fed officials give more weight to core inflation because it excludes those volatile elements that are driven by global and environmental forces.
• Sticky U.S. core inflation data cemented market expectations that the Fed would begin to gradually cut key lending rates. According to the CME FedWatch tool, the probability that the Fed will cut interest rates by 50 basis points (bps) to 4.75%-5.00% in September fell to 13% from 40% a week ago.
• In Thursday’s session, market participants will focus on US producer price index (PPI) data for August and initial jobless claims data for the week ending September 6, which will be released at 12:30 GMT . The significance of jobless claims data has increased as recent comments from Fed officials signal that the central bank has become more concerned with reviving job growth.

Technical analysis: EUR/USD approaches 1.1000

EUR/USD is trading on a margin or break near 1.1000 ahead of the ECB’s interest rate policy decision. The pair corrected close to the upper line of a Rising Channel formation on the daily time frame, from where it produced a breakout on August 14 that led to a sharp move up. The 20-day exponential moving average (EMA) near 1.1047 acts as a major resistance for Euro bulls.

The 14-day Relative Strength Index (RSI) is falling further below 50.00, suggesting that the near-term outlook is uncertain.

The pair continues to hold the psychological level of 1.1000. A downside move below the same value would pull the asset towards the July 17 high near 1.0950. On the other hand, last week’s high of 1.1155 and round level resistance of 1.1200 will act as major barricades for Euro bulls.