EUR/USD extends decline as technical breakdown deepens

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EUR/USD breaks lower despite softer Fed outlook

Eurozone data fail to lift euro

Yesterday’s eurozone macroeconomic data failed to provide strong support for the euro. Unemployment remained at 6.4% in August, meaning the labor market remains resilient, but there are no signs of additional economic acceleration in these figures. At the same time, the inflation backdrop in the region remains uncomfortable for the ECB: August HICP stood at 3.2% y/y, while rising energy prices remain the main source of risk.

Against this backdrop, following the September increase in the deposit rate to 2.50%, the market continues to price in the possibility of another move higher, although expectations for the October meeting are now fairly close to balanced between a hike and a pause. The ECB, meanwhile, continues to maintain a fully data-dependent approach and is not providing the market with a predetermined rate path.

Fed expectations turn less hawkish

U.S. macroeconomic data released yesterday proved more important for the pair. U.S. GDP for Q2 was revised higher to an annualized 2.2%, confirming the resilience of the economy, while consumer spending rose by 0.9% in August. At the same time, PCE came in softer than expected: the headline index rose by 0.3% m/m, while Core PCE stood at 3.0% y/y.

This combination changed expectations for the Fed. Following the September rate hike, the target range stands at 3.75–4.00%, but the probability of another increase in October fell to around 35–40% by the end of yesterday’s session, while a pause once again became the more likely scenario.

In other words, the data do not look weak enough to trigger a rapid policy reversal, but the need for another immediate rate increase has also become less obvious. For EUR/USD, this creates a fairly typical divergence: the relative shift in rate expectations is no longer as clearly supportive of the dollar as it was a few days ago, yet the pair continues to fall.

Technical pressure keeps sellers in control

This suggests that the market is currently reacting more strongly to the technical breakdown, high U.S. Treasury yields and, as noted in EUR/USD stays under pressure despite rebound, broad demand for the dollar than to the modest easing in Fed expectations. Bears may now target a test of support around 1.1250–1.1200, but the risks of profit-taking on short positions and an upward rebound have increased substantially, meaning sellers should remain extremely cautious.

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