The EUR/USD stands out as our currency pair of the week, primarily because the ECB’s policy decision is positioned between two significant US inflation data releases. However, with a sparse calendar in the initial days of the week, traders will derive their insights from oil prices, which are on the rise due to the increasing tensions between the US and Iran. The higher oil prices rise, the more challenging the situation may become for the euro. It is worth noting that the euro has shown relatively strong performance during the recent increases in oil prices compared to earlier this year. Nonetheless, the risks to the near EUR/USD forecast are skewed to the downside as the pair approaches the 200-day average in anticipation of a crucial week. In recent months, economic data has assumed a more significant role in influencing FX volatility compared to energy prices. This is because, in contrast to earlier in the year, the baseline for any potential increases in oil prices has been significantly elevated compared to the levels prior to the conflict.
At the beginning of the year, oil prices surged dramatically in both nominal and percentage terms, rising from a previously low baseline. Recent gains have been considerably less striking in percentage terms and thus marginally less inflationary (recall that inflation refers to the rate of change of prices). Well, that is the situation as it stands currently. If oil prices surpass $100 per barrel, it is likely that the euro will respond unfavourably, shifting attention away from economic data once again. Currently, the forecast and direction of the EUR/USD are primarily influenced by the comparative monetary policy perspectives in the Eurozone and the United States. With both central banks adopting a hawkish stance, the pair has continued to consolidate, exhibiting a modest bullish inclination. That is attributable primarily to unexpectedly robust Eurozone data, while in the United States, economic growth has been experiencing a decline. The relatively robust Eurozone data, alongside persistently high energy prices, has led traders to anticipate a rate hike from the ECB, with additional increases also projected during this cycle.
The key question, therefore, is whether the ECB will validate the hawkish repricing of eurozone rates, or whether Christine Lagarde and her colleagues will prove to be somewhat less dovish. Validating the hawkish pricing of Eurozone rates is likely to offer additional support for the euro. However, if Lagarde indicates that the central bank is content to overlook the recent surge in oil prices and suggests that rates will not be tightened further, this could negatively impact the euro. For what it is worth, I believe the ECB will be eager to emphasise stagflation risks in light of ongoing uncertainty in the Middle East, rather than focusing on the slight improvement in the data. That could indicate a more accommodative policy decision than anticipated. Consequently, the EUR/USD may decline as a reaction to the ECB’s selection of language and economic forecasts. The ECB’s rate decision is scheduled for Thursday, September 10, and it is anticipated that the outcome will be an increase, as previously discussed. The eurozone economy has demonstrated unexpected robustness in the face of the Middle East conflict, as headline inflation persists in its upward trajectory amid sustained high oil prices. What this implies for the euro and our projections regarding its trajectory have been elaborated upon previously.
In the United States, the initial inflation report, specifically the producer price index, is set to be released in the context of the European Central Bank’s interest rate decision and subsequent press conference. This timing positions the EUR/USD as a significant currency pair to monitor between 13:00 and 14:00. Inflation stands as the sole significant data point from the US ahead of the Federal Reserve’s forthcoming meeting. However, the most significant event may be reserved for the end: the US consumer price index on Friday, September 11. There exists a notable divergence within the Federal Reserve, as Chair Kevin Warsh has taken a hawkish position at the Jackson Hole summit, in contrast to Governor Christopher Waller, who expressed a more cautious approach last week, indicating a preference to assess inflation data prior to making a decision regarding a rate hike or the maintenance of current rates. This renders the CPI release a vital component of economic data, serving as the final significant update prior to the Fed’s forthcoming meeting.
