Danske Research Team notes that the United States (US) Personal Consumption Expenditures (PCE) Price Index inflation surprise triggered a hawkish market reaction, pushing US rates higher and weighing on EUR/USD. The pair dropped to 1.1650 as the US Dollar (USD) found support from stronger data. Markets also increased pricing for a potential September Fed rate hike, reinforcing downside pressure on EUR/USD.

Dollar strength weighs on Euro

“In the US, headline PCE inflation came in slightly above expectations at 3.7% y/y in July, unchanged from the previous month and above consensus at 3.6%. On a monthly basis, headline PCE rose 0.2% m/m versus expectations of 0.1%. Core PCE was in line with expectations at 3.3% y/y and 0.2% m/m.”

“Markets reacted hawkishly to the print, with rates moving higher across both the short and long ends of the curve, while EUR/USD moved lower. Market pricing of a September Fed rate hike increased after the release.”

“The USD found support in somewhat stronger-than-expected PCE inflation reading, with EUR/USD dropping to 1.1650.”

“In the US, Fed’s annual Jackson Hole conference will take place. This year’s topic is “Financial Innovation: Implications for Payments and Policy”. The main market mover during the conference is Fed chairman Warsh’s speech on Friday. Markets will look for any hints about monetary policy in September. We expect Warsh to continue his pattern of providing little to no forward guidance.”

“In the euro area, the minutes from the ECB’s July meeting will be published today at 13:30 CET. They will reveal discussions from the meeting where the ECB held policy rates steady. We expect the minutes to show a bias for a rate hike in September, which is also fully priced in by markets. There will likely be limited signals beyond September, so it is not expected to be a market mover.”