Fundamental Overview

USD:

The US dollar spiked higher on Friday after the August non-farm payrolls (NFP) report showed job growth nearly tripling the consensus estimate of 56K. The gains did not last long, however, as most of the NFP-driven moves were faded soon after.

The reason is that the market's focus was not on the NFP report but on the CPI. Markets pay closest attention to the data that the central bank is focused on, and the Federal Reserve is currently focused on inflation. This reflects the Fed's dual mandate framework, in which inflation and employment both guide policy, but with inflation running well above the Fed's 2% target through 2022, inflation data has become the primary trigger for rate-expectation repricing.

Indeed, just one day before the NFP release, Fed Governor Waller said he would support keeping interest rates unchanged at the upcoming FOMC meeting, but that a hot CPI print would make him consider a rate hike. Waller's remarks carry weight with markets because he is a voting member of the FOMC, making his tolerance threshold for another hike a key reference point for how traders interpret the inflation data.

This week is therefore all about the US CPI data. Unless there is a surprising breakthrough in US-Iran relations, price action will likely remain mostly rangebound or slightly positive for the greenback, as traders may at some point begin hedging ahead of the CPI release. US-Iran headlines matter for the dollar indirectly: any easing of tensions would lower oil prices, and cheaper energy reduces one of the upward pressures on inflation.

A soft or in-line CPI would likely weaken the dollar, given Waller's comment that he would not consider a rate hike unless the CPI comes in hot. Conversely, an upside surprise in the core monthly inflation data would likely trigger another rally on a hawkish repricing. The core reading is the more market-sensitive figure, as the Fed's preferred gauge strips out volatile food and energy components when assessing underlying price pressures.

EUR:

On the euro side, the ECB is widely expected to raise interest rates by 25 basis points at its upcoming meeting, bringing the policy rate to 2.50%. This would continue the ECB's most aggressive tightening cycle since the euro's introduction, launched in July 2022 in response to record-high eurozone inflation. The move was also confirmed by "ECB sources," which reported that the central bank is ready to raise rates in September but added that there is little appetite to signal further tightening afterwards.

This means the current market pricing of 44 basis points of tightening by year-end may be mispriced, and the euro could come under some pressure if economic data begins to weaken. That vulnerability is heightened by the eurozone's exposure to the energy crisis triggered by the war in Ukraine, which has weighed on the bloc's growth outlook even as inflation remains elevated. For now, however, EUR/USD will be driven mainly by the US dollar side, as that is where expectations are seeing the greater volatility.

EUR/USD Technical Analysis – Daily Timeframe

On the daily chart, EUR/USD is consolidating above the support zone around the 1.1560 level. If the price pulls back into that support again, buyers can be expected to step in with defined risk below the support, continuing to target the 1.18 handle. Sellers, on the other hand, will want to see the price break lower to increase bearish bets into the major 1.14 support below.

EUR/USD Technical Analysis – 4-Hour Timeframe

On the 4-hour chart, price action has been mostly rangebound since the hawkish Warsh speech, with a couple of spikes driven by Fed's Waller's comments and the strong NFP report. The 1.1660 level may therefore act as resistance and define the 1.1560–1.1660 range. Buyers will want to see the price break above that resistance to position for a rally into the 1.18 handle, while sellers will look for a break below the support to position for a drop into the 1.14 support next.

EUR/USD Technical Analysis – 1-Hour Timeframe

On the 1-hour chart, there is little to add: the choppy price action is likely to persist until the US CPI release. The red lines on the chart define the average daily range for the day.

Upcoming Catalysts

On Thursday, the US PPI report and US Jobless Claims figures are due. On Friday, the week concludes with the US CPI report.

Source: Investinglive