EUR/USD Slips as Markets Eye Federal Reserve Rate Cuts Ahead

The EUR/USD pair slipped and traded around 1.1725[1] in Friday's Asian session, as demand for the US Dollar strengthened. Further losses are believed to be limited as the markets continue to anticipate further reduction in the interest rates by the Federal Reserve[2] during its meeting next week. According to market commentators, traders will now turn to new economic signals and the August Harmonised Index of Consumer Prices (HICP) in Germany and the Consumer Sentiment Index of the University of Michigan[3], which have yet to be released, later today will likely bring some new light to the currency pair.

Market reports note that the European Central Bank (ECB)[4] maintained the interest rates at the same level during its meeting in September and the deposit facility remained at 2.0%. Policymakers point out that inflation and growth are performing well than they had anticipated and this lowers the chances of new rate cuts in the current year. The decision is believed to arrive at a time when the world is too uncertain, and President Trump is demanding increased tariffs. Although the ECB did not ignore risks in the future, it was more balanced about the future and marked a more stable policy in the meantime and relieved some of the pressure on the Euro.

Market analysts[5] note traders are reducing forecasts on additional European Central bank rate cuts, which will provide some short-term aid to the euro. Market reports[6] point out that the money markets currently have an approximate 40% probability of a single reduction through to next spring, unlike the previous probability levels in the markets prior to the recent policy decision. The move is an indication that investors believe that the ECB might have come to the end of the reduction cycle, which would alleviate the pressure on the common currency.

Market reports note that the number of US jobless claims[7] increased early with inflation slightly picking up interest, as more eyes remain on the next move that will be taken by the Federal Reserve. Market commentators[8] mark that the markets have already priced in a rate cut in September and now it is expected to have three rate cuts this year instead of two. Market reports also indicate that Fed Chair Jerome Powell[9], and his peers have indicated a more relaxed policy stance despite lingering tariff-related inflation risk. It is believed that this dovish position (A move to prioritise gentle measures, like lowering interest rates, to stimulate economic growth.) may strangle the US dollar[10] and support major currency pairs.

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NZD/USD Slips Amid US Dollar Rebound and Ongoing China Concerns

The NZD/USD pair slipped and traded around 0.5870[11] in Friday's Asian session, pressured by a modest rebound in the US Dollar and ongoing deflationary trends in China. The weak demand outlook by China is believed to still continue to affect the Kiwi[12] and curb any upside action. Market reports point out that traders are now apprehensive before the release of the University of Michigan Consumer Sentiment Index[13] later in the day, which would offer new guidance to the pair, depending on the influence of the US consumer confidence data on the market expectations.

Market commentators note that China’ Consumer Price Index (CPI)[14] has gone back to negative numbers in August, signifying the continued deflationary pressures. The official data released by National Bureau of Statistics indicated that prices decreased by 0.4% on an year to year basis, which was higher than an estimated 0.2% decrease. Some market reports[15] point out that the numbers indicate that the economy is still burdened by low domestic consumption and surplus industrial production. Reports also note, as households are spending carefully and factories are making too much, China is finding it hard to produce sustainable inflation, which should lead to questions about how strong its post-pandemic recovery could be.

Market commentators point out that China's CPI[16] is considered to be one of the primary indicators of the economy. This is because a weak reading[17] indicates a weaker demand that may pull down the New Zealand dollar. Some analysts[18] anticipate that since China is one of the key trading partners of New Zealand, the Kiwi tends to respond to any indication of stagnation in Chinese growth.

The US Consumer Price Index (CPI)[19] inflation is increasing at higher rates than expected as reported by the market in August which is the highest rate of increase in seven months. The markets are expected to believe that the numbers were not so great as what markets feared and thus they still have hope that the Federal Reserve will push on with interest rate cuts next week. It is anticipated that the US dollar[20] could be burdened by the prospects of falling rates and stabilize the currency pair in the short-term. Some analysts[21] believe that softer jobs data has been used to justify a dovish position but any unexpected increase in the CPI could prompt Fed to re-evaluate its strategy.

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USD/CAD Edges Higher on US Dollar Strength Amid Cautious Market Watch

The USD/CAD pair moved slightly higher and traded around 1.3840[22] in Friday's Asian session, after rising about a quarter of a percent in the previous session. The pair is believed to be underpinned by a stronger US Dollar[23] which has regained some of its previous weakness. Market commentators observe that market traders now await the University of Michigan Consumer Sentiment Index[24] which is yet to be released later in the day. The market participants will keep an eye on whether the information provides new indications on the US economic confidence and the expectations of its future policies.

The USD/CAD pair[25] is believed to have problems gaining the gains further because the US Dollar is under strain due to the lower employment figures even though the inflation statistics are stronger. Some analysts note that the Federal Reserve[26] is under growing pressure to provide a quarter-point reduction in its Fed Funds rate at its next meeting next week, with increased chances of a more sizable 50-point cut also increasing. Market commentators[27] point out that this change of sentiment illustrates the importance of soft labour market conditions over price pressures which keeps the Greenback on the back foot against its Canadian counterpart.

The market reports have noted that the US inflation was on the increase in August, where the Consumer Price Index (CPI)[28] increased by 2.9% year-on-year, compared to July of 2.7% which is within the expectation. Monthly, CPI increased 0.4%, after 0.2% last month. The core CPI, without food and energy, improved 3.1% compared with a year ago, as predicted. In the meantime, US labour[29] numbers recorded first-time jobless benefits at 263,000, the most in a long time, and easily in excess of the anticipations of 235,000, indicating a tiny slowdown of the jobs market.

Market commentators note that the Canadian Dollar is experiencing pressure with poor jobs and inflation figures driving speculation of a Bank of Canada (BoC)[30] rate cut. Some analysts[31] anticipate that as markets are already pricing in a 70% probability of easing next week, a lighter CPI reading will further bolster the argument, and USD/CAD will continue to hold water even in the near future.

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AUD/USD Steadies on Aussie Data, Cautious RBA, Fed Rate Bets

The AUD/USD pair gained steadiness and traded near 0.6660[32] in Friday's trading session, against the US Dollar, following earlier gains this week. It is assumed that this force is reinforced by positive Australian economic statistics and forecasts that the Reserve Bank of Australia (RBA)[33] will not change its course in September. Some analysts[34] anticipate that market swaps price an 86% probability that no changes will be applied to the rate as an indication of a positive domestic picture with consumer inflation expectations increasing to 4.7% in August as compared to the lows of 3.9%. RBA Governor Michele Bullock[35] reported that there was a low growth in the private sector, which facilitates the stability of the economy.

Market commentators[36] point out that even though the AUD gained, the US Dollar continues to be under fire due to a mixed bag of economic data. Market reports note that the US Consumer Price Index (CPI)[37] rose by 2.9% points on a year on year basis in August, an improvement of 2.7% in July, and monthly inflation increased by 0.4% points, more than the 0.2% increase in July. Excluding food and energy Core CPI inflation remained unchanged at 3.1%. Nevertheless, it is believed that the labour market presented a sluggish response as initial jobless claims[38] rose to 263,000 to be highest since 2021 and above forecasts of 235,000 to be the slowing growth in jobs.

Mixed economic signals are believed to have fuelled speculation that the US Federal Reserve (Fed)[39] will reduce interest rates during its next meeting. Market reports[40] point out that the market anticipations are now shifting towards at least 25 basis-point reduction and there is increasingly growing speculation that the reduction may be 50 points. This dovish position ( a stance that prioritizes economic growth and employment over controlling inflation.) is also thought to be a contrast with the Reserve Bank of Australia[41] being cautious, which leaves uncertainty in the AUD/USD pair. Market commentators observe that traders now await the University of Michigan Consumer Sentiment Index[42], which will be presented later today and give insight into the US consumer confidence and consumer spending. Some analysts[43] anticipate that a higher reading may postpone Fed easing and a less impactful number may enhance anticipations of rate cuts.

Market commentators[44] note that technically the AUD/USD pair is trading above its nine day exponential moving average at a bullish momentum and is moving towards the upper boundary of its rising channel at 0.6680. It is believed that the bottom channel support is close to 0.6560[45], and anything lower would indicate the weakening momentum.

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