EUR/USD Holds Near 1.16 as ECB Rate Hike and US CPI Take Centre Stage

Key Takeaways

• EUR/USD is trading near 1.16 as investors await Thursday’s European Central Bank interest-rate decision.
• A 25-basis-point ECB rate hike is widely expected after Eurozone inflation accelerated to 3.3% in August.
• Friday’s US CPI report could determine whether the Federal Reserve raises rates at its September meeting.

EUR/USD Consolidates Near 1.16

EUR/USD remained relatively steady near 1.1625 on Tuesday as traders prepared for a pivotal week of central-bank decisions and inflation data.

The currency pair has recently traded within a range of approximately 1.1560 to 1.1660, reflecting competing monetary-policy expectations on both sides of the Atlantic. Prospects of another ECB rate increase have supported the euro, while resilient US employment data, elevated Treasury yields and geopolitical demand for the dollar have limited the pair’s upside.

The narrow trading range suggests that investors are reluctant to establish large directional positions before Thursday’s ECB decision and Friday’s US Consumer Price Index report.

These events could reshape expectations for both European and US interest rates, potentially determining whether EUR/USD breaks above resistance or returns towards its recent lows.

ECB Expected to Raise Deposit Rate to 2.50%

The ECB is widely expected to raise its deposit facility rate by 25 basis points on Thursday, taking it from 2.25% to 2.50%.

The central bank left its three main interest rates unchanged at its July meeting after raising rates in June. The ECB’s current deposit rate stands at 2.25%, while the main refinancing and marginal lending facility rates are 2.40% and 2.65%, respectively.

Expectations for another rate increase strengthened after Eurozone annual inflation accelerated to 3.3% in August from 2.9% in July. The reading remains well above the ECB’s medium-term target of 2%.

Energy prices were the main driver of the increase. Energy inflation surged to 14.3% from 10.3%, while core inflation excluding energy, food, alcohol and tobacco eased slightly to 2.4%. Services inflation also slowed to 3.0%.

The contrast between rising headline inflation and softer underlying price pressures could complicate the ECB’s policy message. A quarter-point increase is largely anticipated, meaning the euro’s reaction may depend more heavily on President Christine Lagarde’s comments about future decisions.

A hawkish signal that further tightening remains possible could support EUR/USD. By contrast, indications that September’s increase may be the final move for an extended period could encourage traders to take profits on existing euro positions.

Strong US Jobs Report Fails to Sustain Dollar Rally

The euro’s resilience is notable because Friday’s US employment report was considerably stronger than expected.

US nonfarm payrolls increased by 162,000 in August, compared with forecasts of roughly 55,000. The unemployment rate remained unchanged at 4.1%, while average hourly earnings rose 0.3% month over month and 3.1% from a year earlier.

Previous employment figures were also revised higher. June payroll growth was lifted from 20,000 to 31,000, while July was revised from a reported decline of 23,000 to a gain of 21,000. The two-month revisions added 55,000 jobs to earlier estimates.

The stronger report initially supported the dollar and increased expectations that the Federal Reserve could raise interest rates in September. However, the currency was unable to maintain all its gains.

That reaction suggests that some of the stronger labour-market outlook had already been reflected in US interest-rate expectations. The dollar has also faced pressure from yen strength and the unwinding of some carry-trade positions.

For EUR/USD, the muted dollar response has allowed the pair to remain above 1.16 despite a more hawkish shift in expectations for the Federal Reserve.

US CPI Could Decide the Fed’s September Move

Attention now turns to the US August CPI report, scheduled for release on Friday at 8:30 a.m. Eastern Time.

Headline consumer prices are expected to have increased by around 0.4% month over month, partly reflecting higher energy costs. Core prices, which exclude food and energy, are forecast to rise by approximately 0.2%.

On an annual basis, headline inflation is expected to remain near 3.4%, while core inflation may ease to around 2.4%.

A stronger-than-expected CPI report would reinforce the case for a September Fed rate increase. Higher US rate expectations could lift Treasury yields and strengthen the dollar, potentially pushing EUR/USD towards 1.1600 or the lower boundary near 1.1560.

A softer reading would challenge expectations for immediate Fed tightening. In that scenario, declining yields and a weaker dollar could help EUR/USD test resistance between 1.1650 and 1.1660.

The CPI release may therefore prove more important for the pair’s direction than the jobs report, particularly because Federal Reserve officials remain divided over whether recent inflationary pressure justifies another rate increase.

Oil Prices Add to Inflation and Currency Uncertainty

Rising oil prices are adding another layer of uncertainty to the EUR/USD outlook.

Brent crude has climbed towards $97–$98 per barrel, while West Texas Intermediate is trading above $92. Renewed US-Iran tensions and concerns about shipping and energy supplies in the Middle East have pushed crude prices to six-week highs.

Higher energy prices can affect EUR/USD in several ways. As a major energy importer, the Eurozone faces weaker trade conditions and pressure on household purchasing power when oil prices rise. These effects can weigh on economic growth and the euro.

However, sustained energy inflation may also force the ECB to maintain tighter monetary policy. Expectations of higher European interest rates could partially offset the negative economic effect and provide support for the currency.

For the dollar, geopolitical tensions may encourage safe-haven demand. Higher oil prices could also keep US inflation elevated, strengthening the argument for tighter Federal Reserve policy.

Weak German Industrial Production Has Limited Impact

German industrial production declined by 1.1% in July from the previous month, highlighting continued weakness in the Eurozone’s largest economy.

EUR/USD showed little sustained reaction to the report. Investors appear more focused on inflation and monetary policy than on individual growth indicators.

Nevertheless, continued weakness in German manufacturing could become more important if the ECB signals that interest rates may remain elevated for longer. Higher financing and energy costs could place additional pressure on energy-intensive industries and investment.

This tension between above-target inflation and subdued industrial activity will be an important part of the ECB’s policy assessment.

EUR/USD Outlook

EUR/USD may remain rangebound before Thursday’s ECB announcement. A 25-basis-point increase is largely anticipated, so the euro will require a sufficiently hawkish policy message to generate a sustained upside move.

Friday’s CPI report then shifts the focus to the Federal Reserve. Hotter US inflation could strengthen the dollar and pull EUR/USD below 1.16, while softer price data could reduce Fed tightening expectations and support a break above 1.1660.

Until those catalysts arrive, the pair is likely to remain sensitive to oil prices, Treasury yields and developments in the US-Iran conflict.