- EUR/USD faces challenges as the US Dollar appreciates amid increased risk aversion.
- CME’s FedWatch Tool indicates that markets are pricing in a 91.6% probability of the Fed rate cut next month.
- The ECB is expected to keep interest rates unchanged, as Eurozone annual inflation remained steady at 2.0% in July.
EUR/USD extends its losses for the second consecutive day, trading around 1.1560 during the Asian hours on Tuesday. The pair depreciates as the US Dollar (USD) gains ground following traders’ caution, driven by the latest global trade developments and shifting expectations for monetary policy. Market participants will likely observe the HCOB Composite and Services Purchasing Managers’ Index (PMI) data from the Eurozone and Germany later in the day. Focus will shift toward the US ISM PMI later in the North American session.
The market sentiment turns cautious over rising concerns over the Federal Reserve’s (Fed) independence. US Federal Reserve (Fed) Governor Adriana Kugler unexpectedly resigned on Monday. This event has provided US President Donald Trump an earlier-than-anticipated opportunity to influence the central bank. Trump may nominate a replacement potentially more aligned with his calls for lower rates.
However, the Greenback may struggle amid rising odds of an interest rate cut by the US Federal Reserve (Fed) in September, following weaker labor market data that has heightened concerns over the US economic outlook. According to CME’s FedWatch Tool, markets are pricing in a 91.6% chance of a Federal Reserve rate cut next month.
Additionally, San Francisco Fed President Mary C. Daly said late Monday that although there are plenty of reasons to start looking at interest rate cuts, there remains plenty of uncertainty, making it difficult for Fed officials to step into rate trimming too quickly. We can’t wait to be certain there is no inflation persistence, need to make a call based on what’s most likely, Daly added.
In comparison, the European Central Bank (ECB) is expected to hold rates steady as the Eurozone annual inflation held at 2.0% in July, slightly above the 1.9% forecast. Meanwhile, traders adopt caution amid the imposition of 15% US tariffs on goods imported from the European Union (EU).
