Focus Shifts to US PCE Inflation Following Fed's Recent Rate Cut

The Federal Reserve has made headlines this week by reducing the benchmark interest rate by 50 basis points, marking a significant shift in its monetary policy. This decision has led to a notable decline in the US Dollar (USD), although Fed Chair Jerome Powell's remarks helped stabilize market reactions.

The EUR/USD currency pair has been hovering around the 1.1160 mark, after attempting to break through the 1.1200 threshold multiple times since mid-August. Traders had been anticipating the Fed's monetary policy announcement, which ultimately resulted in the rate cut aimed at supporting economic growth and bringing inflation closer to the Fed's target of around 2%.

According to the Federal Open Market Committee (FOMC), there is now increased confidence that inflation is moving sustainably towards this target. The Summary of Economic Projections (SEP), often referred to as the dot plot, indicates that FOMC members expect an additional 50 basis points cut this year, followed by 100 basis points in 2025 and another 50 in 2026, leading to a terminal rate of 2.9%. Powell emphasized that future decisions will hinge on macroeconomic data and will be made on a meeting-by-meeting basis, which helped to calm initial market fears.

Despite the Fed's aggressive stance, US stock indexes experienced modest losses after an initial rally, while the USD regained some ground before resuming its downward trend. The Fed's decision to maintain high rates for an extended period poses risks for economic growth, but it appears to be effective in steering the US away from a recession. The easing of government bond yields, particularly with the 2-year Treasury note yielding less than the 10-year, signals growing confidence in a potential recovery.

Currently, the Fed's key rate is set between 4.75% and 5%. Meanwhile, the European Central Bank (ECB) has already reduced interest rates, with the benchmark rate on the Deposit Facility now at 3.5%. Despite the Fed's aggressive measures, holding USD remains more favorable than Euro.

European economic data continues to disappoint, with the German ZEW Survey indicating a sharp decline in Economic Sentiment, dropping to 3.6 in Germany and 9.3 in the Eurozone for September. The current situation assessment in Germany worsened to -84.5 from -77.3. Furthermore, the EU confirmed a 2.2% year-over-year increase in the Harmonized Index of Consumer Prices (HICP) for August, with a downward revision of the monthly increase to 0.1%. However, the EU did report an improvement in September’s preliminary Consumer Confidence, rising to -12.9 from -13.5 in August.

On the other side of the Atlantic, the US saw Retail Sales increase by 0.1% in August, surpassing expectations of a 0.2% decline.

Looking ahead, the upcoming week will kick off with the Hamburg Commercial Bank (HCOB) and S&P Global releasing preliminary estimates for the September Purchasing Managers Indexes (PMIs) for both European economies and the US on Monday. Additionally, on Thursday, the US will unveil the final estimate for the second quarter Gross Domestic Product (GDP) and August Durable Goods Orders. Finally, on Friday, the August Personal Consumption Expenditures (PCE) Price Index, the Fed's preferred inflation measure, will be published. Investors will be keenly watching for any divergences in the figures, which could influence expectations for the Fed's actions in November. Currently, financial markets are anticipating a 25 basis point rate cut, but if inflation decreases more than expected, speculation may arise for a more substantial 50 basis point reduction.

For the EUR/USD pair to confirm bullish sentiment, it must decisively break above the 1.1200 mark. Technical indicators on the weekly chart show upward momentum, with the pair finding support around the flat 200 Simple Moving Average (SMA) in the 1.1050 zone. The 20 and 100 SMAs are also trending upwards, indicating increased buying interest.

On the daily chart, the EUR/USD remains bullish, although momentum is beginning to wane. The 20 SMA is providing support around 1.1090, while longer moving averages are trending higher. Technical indicators have dipped slightly but remain in positive territory.

Support levels are established at 1.1090 and 1.1050, with a significant level at 1.1000. If the pair surpasses 1.1200, it could target 1.1240 and 1.1300, with a longer-term goal of reaching 1.1470.