Euro trims intraday losses as traders weigh Fed-ECB interest rate outlooks

• EUR/USD reverses earlier losses as the US Dollar retreats from its intraday high.
• Sticky US inflation keeps higher-for-longer Fed expectations in place ahead of Warsh’s Jackson Hole speech.
• Markets widely expect the ECB to raise interest rates at its September meeting.

EUR/USD reverses its earlier losses on Thursday after coming under pressure on the previous day as the latest US inflation figures helped the US Dollar (USD) regain some lost ground. At the time of writing, the pair trades around 1.1658, recovering from an intraday low of 1.1636 but remains below the three-month high of 1.1711 touched earlier this week.

The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, trades around 99.05, retreating from an intraday high of 99.26.

US Personal Consumption Expenditures (PCE) Price Index data released on Wednesday showed that inflation remains sticky. Although price pressures are no longer accelerating sharply, the data offered little evidence that inflation is moving convincingly toward the Federal Reserve’s (Fed) 2% target. At the same time, elevated Oil prices due to Middle East tensions continue to pose a risk that inflation could pick up again.

Against this backdrop, traders expect the Fed to keep interest rates higher for longer, while the possibility of a rate hike cannot be ruled out. However, an imminent move is not the base case, with the CME FedWatch Tool showing around a 62% chance that the central bank will leave borrowing costs unchanged in September. Traders now look ahead to Fed Chair Kevin Warsh’s speech at the Jackson Hole Symposium on Friday for fresh guidance on the interest rate path.

Kansas City Fed President Jeff Schmid said on Thursday the energy shock is leaking into the economy and stressed that the Fed needs to return inflation to 2%. Schmid also said he probably would have supported a rate hike at the July policy meeting.

US labour-market data released on Thursday showed Initial Jobless Claims fell to 203K in the week ending August 22, below market expectations of 208K and the previous reading of 207K.

Across the Atlantic, the European Central Bank (ECB) is widely expected to raise interest rates at its September meeting. ECB policymaker Dimitar Radev said on Thursday that “I am willing to move into restrictive if conditions warrant,” while adding that the neutral rate is “probably around 2.5%.” He also said policymakers “need to take tighter financial conditions into account.”

Meanwhile, the ECB’s July meeting account showed that policymakers viewed the latest pause as temporary rather than the end of the tightening cycle. Members said, “another rate hike would likely be necessary unless the inflation outlook improved significantly.”