EUR/USD Trading Insights: Key Economic Data and ECB Rate Cut Speculations

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As the trading week commences, the euro is trading near 1.118 US dollars, with investors bracing for a week filled with crucial economic data from the eurozone. Preliminary figures are anticipated to reveal that inflation in the eurozone has dipped to the European Central Bank's (ECB) target of 2%, marking its lowest level since June 2021. Specifically, inflation in Germany is expected to decrease to 1.7%, the lowest since February 2021, while Italy may see inflation drop to 0.8%.

The Purchasing Managers' Index (PMI) data is likely to confirm ongoing economic weakness, with Spain's manufacturing sector stagnating and sharper declines expected in Italy and Switzerland. Furthermore, Spain's services sector is projected to expand at a slower pace. ECB President Christine Lagarde is also set to address the European Parliament this week, adding to the market's anticipation.

Last week, inflation figures from France and Spain fell more than expected, igniting speculation that the ECB may hasten its rate-cutting cycle, having already implemented two cuts this year. Financial markets are currently pricing in a potential rate cut on October 17.

Despite the speculation surrounding accelerated rate cuts, the euro has faced setbacks this week. According to reliable trading platforms, the euro/dollar exchange rate reached a new high of 1.1212 last week but has since declined, with charts indicating a potential upward breakout. The technical setup appears constructive, suggesting further gains this week, but analysts caution against betting on significant upside given the upcoming economic calendar risks.

Forex analysts at Credit Agricole note that investor nerves are heightened ahead of several Federal Reserve speakers this week, alongside the release of US ISM and labor market data. The 1.1212 barrier remains the upside target, achievable if US data falls short of expectations. Conversely, if the euro bulls do not gain momentum, a pullback to the 1.1083 level is likely, where buying interest may emerge. This level corresponds to the 23.6% Fibonacci retracement of the 2024 high, previously validated as a predictive level.

Currently, the euro continues to trade near recent highs against the US dollar, yet it is increasingly pressured by expectations of aggressive ECB interest rate cuts, particularly following last week’s substantial rate cut by the Federal Reserve. In the eurozone, the ECB's decisions will be influenced by September inflation figures, with Germany set to release data on Monday, leading up to the full eurozone data on Tuesday. The core Consumer Price Index (CPI) for the eurozone is expected to fall below the ECB's 2.0% target, potentially reaching 1.9%. Recent figures from France and Spain were significantly below expectations, raising the likelihood of another ECB rate cut as early as October to 80%.

The market sentiment is leaning towards dovish expectations, which may limit significant market reactions, such as a decline in the euro against the dollar. Analysts emphasize that the eurozone inflation reading for September is crucial for the ECB's monetary policy decision on October 17. If core and services inflation remain elevated at 2.8% year-on-year and 4.2% year-on-year, respectively, the ECB may focus on addressing these figures, despite some European economies, particularly Germany, requiring more supportive monetary policies.

ECB Governing Council members have expressed the need for caution in rate cuts, but Nomura analyst George Buckley indicates that this week will feature several speeches from ECB policymakers, which will be vital in assessing the ECB's commitment to a faster pace of cuts. All eyes will be on President Lagarde, as markets anticipate her comments regarding the potential for an October rate cut in light of disappointing German data, weak eurozone PMIs in September, and low inflation figures.

Overall, the data suggests that Germany urgently needs ECB rate cuts, and inflation risks falling more rapidly than anticipated. However, the US dollar remains the dominant force in the EUR/USD pair. Traders should monitor US PMI survey data on Tuesday and speeches from FOMC members Cook, Collins, Barkin, and Bostic, with additional PMI figures for the services sector due on Thursday. The week's highlight will be the non-farm payrolls release on Friday, with an expected figure of 144,000. A number slightly below this could indicate a need for more Federal Reserve cuts, maintaining a risk-on sentiment globally. Conversely, a significant decline could signal a potential recession, leading to a dollar recovery and a retest of the technical support level at 1.1083.

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