ECB Decision Looms as Dollar Stays Under Pressure

EUR/USD stabilizes above 1.1400 despite lingering geopolitical uncertainty

The US Dollar Index (DXY), which measures the dollar’s performance against a basket of 6 majors, remained under pressure last week after the CPI report missed expectations. Both the Core and headline versions of the CPI came below the forecast, diminishing chances of a rate hike.

The US Producer Price Index (PPI) also missed the mark, showing that at least for now, inflation worries are subdued. That being said, inflation is still above the Federal Reserve’s 2% target, and a rate hike is still in the books for this year, but the odds are lower. According to the CME FedWatch tool, the probability of a rate hold in September is 40%; a week ago, the percentage was 25%.

The US-Iran conflict continues to be a source of market jitters, as the ceasefire agreement has crumbled. The US military launched strikes on Iran for 7 consecutive days, and Iranian forces attacked US bases in Kuwait, Jordan, and Bahrain. President Trump assured that military attacks will continue until Iran stops striking ships in the Strait of Hormuz and allows safe passage.

Economic Calendar Highlights

We are headed into a week that’s light on economic releases for the dollar. However, the euro is set for volatility on Thursday at 12:15 pm GMT when the interest rate will be announced. There is no change anticipated at this meeting, but the European Central Bank ECB) is likely to hike the rate in September. Half an hour after the rate announcement, at 12:45 pm GMT, ECB President Lagarde will hold the usual press conference and will possibly offer clues about the timing of the next rate increase.

Friday will be filled with Purchasing Managers’ Indexes (PMI) releases, starting at 8:00 am GMT with the European Manufacturing and Services PMIs, and continuing at 8:30 am GMT with the same indicators for the United Kingdom economy. The US will release its Manufacturing and Services PMIs at 2:00 pm GMT. These are not high-impact indicators, but in a slow week, they might have a higher importance than usual.

Technical Outlook – EUR/USD

The pair continues to trade with choppy price action, back above the key level at 1.1400. The balance of power is not clearly tilted towards one side or the other, but the dollar is currently weighed by inflation and uncertainty coming from the US-Iran war.

Depending on how the ECB press conference goes, the euro could gain some strength, which would keep the pair above 1.1400. If price action becomes more directional, we may see a move above the 50-day Moving Average (blue line), which sits overhead at around 1.1500. This is the first resistance, while support is located around 1.1325, the previous low.