Euro Slides as Dollar Gains, Markets Eye Inflation Signal

Key Moments

Euro Under Pressure Around 1.1600

The EUR/USD pair comes under renewed selling interest on Tuesday, struggling to build on the prior session’s recovery from the 100-day Simple Moving Average near the 1.1575-1.1580 area, which marked a one-and-a-half-week low. During the Asian session, the pair drifts lower and trades close to the 1.1600 level, posting a decline of nearly 0.10% for the day as modest US Dollar strength re-emerges. Market participants are now awaiting the preliminary reading of the Eurozone Harmonized Index of Consumer Prices (HICP) for direction.

Eurozone Inflation Expectations and ECB Outlook

According to economists, Eurozone inflation is expected to increase in August amid persistently high energy costs, reinforcing expectations that the European Central Bank is highly likely to deliver a rate hike in September. These views have been bolstered by German Consumer Price Index data, which showed inflation rising to 2.9% YoY in August from 2.8% in the prior month.

Furthermore, comments from ECB Executive Board member Isabel Schnabel, who has “made a clear case for another rate increase,” suggest that the immediate market reaction to the HICP release could be relatively contained, as many investors may already see a tightening move as largely priced in.

US Data Calendar and Fed Expectations Support the Dollar

Later in the North American session, attention will turn to the US economic calendar, which features the ISM Manufacturing PMI and JOLTS Job Openings data. Ahead of those releases, the US Dollar is drawing support from rising expectations of an imminent Federal Reserve rate increase after remarks by Fed Chair Kevin Warsh last Friday.

These growing rate hike bets, combined with ongoing geopolitical risks linked to escalating US-Iran tensions, are aiding safe-haven demand for the Greenback. That backdrop is exerting additional downward pressure on EUR/USD after the modest pullback in the Dollar seen the previous day.

At the same time, Dollar bulls may be reluctant to take on sizable new positions before the release of the key US labor market report, the Nonfarm Payrolls, on Friday. Even so, the underlying fundamental setup is seen as favorable for the US Dollar, implying that any intraday rebounds in EUR/USD are likely to encounter selling interest.

Key Technical Levels for EUR/USD

From a technical standpoint, the pair recently failed to secure a sustained move above the 50% Fibonacci retracement of the January-June decline. In that context, a clear break below the 100-day Simple Moving Average would be viewed as an important trigger for sellers.

If spot prices convincingly break below the 100-day SMA, the move would open the door for a decline toward the 23.6% Fibonacci retracement at 1.1501. A more pronounced downturn could bring the broader structural base at the Fibonacci cycle low near 1.1323 into play.

On the topside, the 38.2% Fibonacci retracement level at 1.1611 is acting as the first barrier. A daily close above this threshold would be required to ease immediate downside risks and potentially pave the way for a move toward the next retracement zones at 1.1700 and 1.1789.