EUR/USD edges lower as hawkish Fed bets steady; US CPI in focus

Fundamental Overview

US Dollar:

The greenback has declined broadly, likely on profit-taking after the hawkish repricing steadied. The US CPI data due next Friday represents the key risk event that could shift market expectations. Currently, traders see a 58% probability of a rate hike in September.

Only a soft CPI reading would likely bring that probability below 50% and dissuade the Fed from raising rates at its next meeting. If the odds remain at 50% or higher, the central bank may be compelled to hike, as failing to do so would send a dovish signal.

Euro:

The European Central Bank is widely expected to raise interest rates by 25 basis points at its upcoming meeting, taking the policy rate to 2.50%. "ECB sources" have confirmed that the bank is ready to raise rates in September but indicated little appetite to signal further tightening beyond that.

This implies that the market's current pricing of 46 basis points of tightening by year-end may be overestimated, and the euro could weaken if economic data begins to deteriorate. However, EUR/USD will be driven primarily by the US dollar side for now, as that is where expectations are most volatile.

EUR/USD Technical Analysis – Daily Timeframe

EUR/USD has bounced from the support zone near 1.1560. Buyers are likely to continue stepping in there with a defined risk below support, targeting the 1.18 level. Sellers, on the other hand, want to see a break lower to add to bearish positions aiming for the key 1.14 support.

EUR/USD Technical Analysis – 4-Hour Timeframe

A downward trendline defines the recent pullback into support. Sellers will likely lean on that trendline with a risk above it, pushing for new lows. Buyers will look for a break higher to add to bullish bets targeting 1.18.

EUR/USD Technical Analysis – 1-Hour Timeframe

A minor upward trendline is shaping the pullback toward the 4-hour trendline. Buyers are expected to use it with risk below, aiming for fresh highs. Sellers will look for a break to enter shorts for a drop to the 1.1560 support and potentially a breakdown.

Upcoming Catalysts

Today, Fed Governor Waller speaks, along with US jobless claims and the ISM Services PMI. Tomorrow, the week concludes with the US nonfarm payrolls report.