EURUSD is clinging to gains above the crucial support of 1.0800 on Tuesday as the Dollar remains under pressure due to firm market speculation that the Fed will start reducing interest rates in September.
According to the CME FedWatch tool, traders see a 77% chance that interest rates will be lower than current levels in the September meeting, up from 65.6% recorded a week ago. Easing US labour market strength has prompted expectations for the Federal Reserve to pivot to policy normalisation in September. The Unemployment Rate rose to its highest in more than two years, and Average Hourly Earnings eased expectedly in June, pointing to moderating labour market conditions.
Focus on Jerome Powell’s Testimony
For fresh guidance on interest rates, investors will shift focus to Jerome Powell’s semi-annual Congressional testimony later Tuesday. The Fed Chair is expected to reiterate that interest rates need to be held steady at current levels until they observe a decline in inflationary pressures for months. Powell acknowledged, in the European Central Bank Forum of Central Banking, that the U.S. central bank has made quite a bit of progress on inflation, and recent data shows that the disinflation process has resumed.
For more clarity on disinflation, investors will focus on the US Consumer Price Index (CPI) report for June, which will be published on Thursday. The core CPI data, which excludes volatile food and energy prices, is estimated to have grown steadily, while headline figures are expected to have decelerated.
Political Dynamics in Europe
EURUSD strengthened as the Euro’s outlook improves after French election polls showed Marine Le Pen’s far-right National Rally missed an absolute majority. This has reduced the risks of widening France’s debt crisis. However, political uncertainty remains intact as no party gained an outright majority. This will lead to the formation of a coalition government that results in a significant delay in fiscal decisions due to divergent opinions.
Investors expect that Jean-Luc Mélenchon’s left-wing coalition, which unexpectedly gained more seats than the rest, will join hands with President Emmanuel Macron’s centrist alliance to form a new government. Meanwhile, easing speculation that the ECB will deliver subsequent rate cuts in the July meeting has supported the downside in the Euro.
Officials expect price pressures will not deviate far from their current levels this year, but an aggressive policy easing stance could revamp them. On Monday, ECB policymaker and Dutch central bank chief Klaas Knot pushed back expectations of rate cuts in July. Knot said in an interview with Handelsblatt, “I don’t see a case for another rate cut in July.” However, he remained comfortable with market expectations of more rate cuts this year, and for that, he is open for the September meeting.
Chart: EURUSD by TradingView
