Euro edges higher to near 1.1600 ahead of German CPI inflation release
- EUR/USD gains traction to near 1.1590 in Monday’s early Asian session.
- Fed’s Warsh signaled rates could be raised if policymakers believe inflation is too high.
- Germany’s CPI inflation is set to rise in August.
The EUR/USD pair gathers strength to around 1.1590 during the early Asian trading hours on Monday. The US Dollar (USD) edges lower against the Euro (EUR) despite hawkish remarks from Federal Reserve (Fed) Chair Kevin Warsh. Traders will take more cues from the preliminary reading of Consumer Price Index (CPI) inflation data from Germany, which is due later on Monday.
Warsh said on Friday at the Jackson Hole symposium that policymakers will "have work to do" if they were not confident cost-of-living pressures were easing for Americans.
“We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed,” said Warsh. “Otherwise, we have work to do,” he added.
The Fed's next interest rate decision will be made on September 15-16. According to the CME FedWatch tool, markets are now pricing in nearly a 57.5% odds of at least 25 basis points (bps) next month, up from 35% before the speech.
Across the pond, preliminary data later in the day is expected to show German CPI to rise to 2.9% YoY in August from 2.8% in July. Meanwhile, Harmonized Index of Consumer Prices (HICP) is projected to show an increase of 3.0% YoY in August, versus 2.8% prior. If the report shows a hotter-than-expected outcome, this could boost the shared currency in the near term.
Euro underperforms as ECB hawkishness hardens on inflation risks
Analysts at Scotiabank note that this week’s data “have confirmed the need for renewed hawkishness from the ECB,” a shift they see clearly reflected in recent remarks from Governing Council member Isabel Schnabel. Schnabel “flagged upside risks to inflation from energy prices – and growth – and maintained expectations for a 25bpt hike in September along with continued tightening in the coming quarters,” reinforcing market perceptions that the ECB is preparing to push ahead with further policy tightening despite lingering growth concerns.
Warsh flags unfinished inflation work as financial conditions stay loose
Fed Chair Warsh delivered a notably more hawkish-toned speech, with an FXS Speechtracker score of 7.4 versus a historical average of 6.5, underscoring concern that underlying inflation has not yet convincingly moved toward the 2% PCE objective. The insistence that the Fed must be “confident underlying inflation is moving to objective, or we have work to do,” combined with the view that financial conditions are not restrictive and credit markets show few signs of policy restraint, points to a bias toward further tightening if price data fail to improve meaningfully. Warsh’s emphasis that recent better-than-expected summer inflation prints do not signal a meaningful change in underlying trends, and that the Fed’s predominant focus should be on prices, reinforces a vigilant stance on inflation risks, supportive of the Dollar on balance.
The FXS Fed Sentiment Index was unchanged, moving 0.00 points to a still-elevated level of 129.70, confirming that the broader policy narrative remains firmly in hawkish territory despite the decision to wait at the July meeting. The combination of a high FXS Fed Sentiment Index reading and an above-baseline FXS Speechtracker score suggests that markets should continue to price a Fed that is prepared to tighten further if inflation expectations or underlying price dynamics show signs of slipping away from the 2% PCE target.
Technical Analysis: EUR/USD
In the daily chart, EUR/USD maintains a mildly bullish near-term tone as it holds above the 100-day simple moving average (SMA) and the lower Bollinger Band, while pressing the 20-day Bollinger SMA, which acts as a nearby pivot. The Relative Strength Index (RSI) at 52.8 sits just above neutral, hinting that directional momentum has slowed but still leans slightly toward the upside rather than signaling overbought conditions.
On the topside, immediate resistance is defined by the Bollinger middle band at 1.1595, with a stronger hurdle at the upper Bollinger Band near 1.1710, where rallies could start to look stretched. On the downside, initial support is located at the 100-day SMA at 1.1570, ahead of a more meaningful bearish trigger at the lower Bollinger Band around 1.1480; a daily close below this lower band would undermine the current constructive bias and open the way to a deeper corrective phase.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Euro FAQs
The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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