EURUSD Recovers Amid Weaker Dollar; Market Eyes Fed and ECB Policy Divergence.

The EURUSD pair managed to break its three-day losing streak, trading around 1.1075 during the early European session on Monday. The Euro's recovery against the US Dollar can be largely attributed to a weaker Dollar, influenced by dovish sentiments surrounding the Federal Reserve's (Fed) monetary policy.

• Despite this upward momentum, the pair's gains were capped by recent US inflation data, which provided some support for the Greenback.
• The broader market is keeping a close eye on the ongoing monetary policy developments on both sides of the Atlantic.

US Inflation Data and Fed Rate Cut Expectations

On Friday, the US Bureau of Economic Analysis reported key inflation figures:

• The headline Personal Consumption Expenditures (PCE) Price Index increased by 2.5% year-over-year in July, slightly below market expectations of 2.6%.
• Core PCE, excluding volatile food and energy prices, also rose by 2.6% year-over-year, consistent with the previous month but marginally below the anticipated 2.7%.

These inflation figures have strengthened the belief that the Fed may opt for a modest rate cut in its September meeting. According to the CME FedWatch Tool:

• There is widespread anticipation of at least a 25 basis point (bps) rate cut by the Fed.
• Federal Reserve Atlanta President Raphael Bostic, known for his hawkish stance, recently hinted that it might be "time to move" on rate cuts, citing cooling inflation and a higher-than-expected unemployment rate.

European Central Bank’s (ECB) Diverging Views on Rate Cuts

The European Central Bank (ECB) is also facing complex decisions regarding interest rates. Some key points include:

• ECB Governing Council member Francois Villeroy de Galhau suggested there are "good reasons" for a rate cut at the September meeting, a view echoed by ECB's Olli Rehn due to a weaker growth outlook.
• However, ECB Executive Board member Isabel Schnabel and Germany’s Joachim Nagel expressed caution against lowering rates too quickly, emphasizing the importance of a gradual approach and data-driven decisions.
• Schnabel and others highlighted persistent inflationary pressures, particularly in the services sector, as a significant concern.

While the EURUSD pair has seen limited upside, inflation in the Eurozone has decreased to 2.2%, close to the ECB’s target of 2%, strengthening the case for a potential rate cut. However, a cautious approach remains crucial as the ECB navigates these challenges.