EUR/USD Rebounds Above 1.1650 as Fed Rate Cut Bets Weigh on US Dollar

EUR/USD Rebounds Above 1.1650 as Fed Rate Cut Bets Weigh on US Dollar

The EUR/USD currency pair rebounded on Friday, climbing to around 1.1660 during Asian trading hours, as the US Dollar (USD) weakened amid rising speculation that the Federal Reserve will cut interest rates in September. The move comes after the pair lost nearly 0.5% on Thursday, weighed down by stronger-than-expected US economic data that temporarily boosted the greenback.

According to the CME FedWatch Tool, traders are now pricing in a 92% probability that the Fed will lower rates by 25 basis points at its September 17 policy meeting. This growing dovish outlook is exerting downward pressure on the dollar, allowing the euro to regain some ground.

Thursday’s sell-off in EUR/USD followed robust US data. The Producer Price Index (PPI) for July rose 3.3% year-over-year, well above the prior reading of 2.4% and surpassing market expectations of 2.5%. Core PPI, which excludes food and energy, jumped 3.7%, up from 2.6% in June and higher than the expected 2.9%. Meanwhile, Initial Jobless Claims for the week ending August 9 fell to 224,000, better than the market consensus of 228,000, suggesting continued labor market strength.

Despite this strong economic data, the market remains focused on the Fed’s likely policy shift, expecting that the central bank may ease monetary conditions in response to broader economic uncertainties and to prevent over-tightening.

On the Eurozone side, the European Central Bank (ECB) is seen as having completed its easing cycle in July, after delivering eight interest rate cuts over the past year. ECB borrowing costs are now at their lowest level since November 2022. Although markets are not expecting further ECB cuts in the near term, another move could be considered in early 2025, depending on inflation and growth trends.

The potential widening interest rate differential between the ECB and the Fed is offering some underlying support for the Euro, helping offset recent losses. With no major economic data releases from the European Union on Friday—due to the Feast of Our Lady of Heaven, a public holiday in many EU countries—traders will continue to focus on US Retail Sales and University of Michigan Consumer Sentiment data due later in the day for further cues.

In the short term, EUR/USD may continue to trade with a slight bullish tilt, especially if upcoming US data reinforces the case for a September rate cut.