The EUR/USD pair opened a new trading week with a minor downward gap of 10-pips, which was immediately filled. In other words, the instrument opened at the level of Friday's close. On the one hand, this indicates that the bearish momentum, triggered by the September Nonfarm Payrolls, has faded. On the other hand, steady fluctuations within the 1.0960–1.0980 range suggest that EUR/USD sellers have secured their position above 1.0900. However, to push toward the support level of 1.0930 and lower—toward 1.0800—the bears need additional arguments. This could come from further strengthening of the greenback and/or weakening of the euro.
The US dollar may receive an additional boost due to doubts about the Federal Reserve's rate cut in the coming month. Until recently, this scenario was out of the question. Two options were on the table—a 50-point rate cut or a 25-point cut. However, last Friday's data on the US employment growth in the private sector significantly changed market expectations. Now, a 50-point rate cut is completely off the table, and the possibility of maintaining the status quo is theoretically considered. Currently, the market is pricing in only a 5% chance of such a scenario (according to CME FedWatch Tool data), with a 25-point rate cut still being the base scenario. However, if the September US inflation reports are favorable, the likelihood of holding a wait-and-see stance in November will increase—albeit only by 10-15%. Still, the mere fact of discussing this option will provide additional support for the US dollar. Consequently, it will also support EUR/USD sellers. So, under current fundamental conditions, the euro cannot play its own game. The single currency cannot independently pull its price upwards (we'll discuss the reasons below)—only in the case of dollar weakness. If the US dollar begins to gain momentum again, the EUR/USD pair will decline—the euro won't resist and will obediently follow the trend.
This is why the reports on the US consumer and factory inflation (CPI and PPI) are so crucial for the EUR/USD pair. After all, traders have already priced in Friday's Nonfarm Payrolls data. The release accomplished an important task for dollar bulls: it ruled out the possibility of a 50-point rate cut. The task for the inflation reports (from the viewpoint of dollar bulls) is to spark a discussion about the necessity or lack of monetary easing at the November meeting.
According to flash estimates, the overall Consumer Price Index for September (due on Thursday, October 10) is expected to decrease to 2.3% year-over-year, marking the lowest level since February 2021. Core CPI is projected to drop to 3.1% year-over-year, which would be the lowest since March 2021. The Producer Price Index (set for release on Friday, October 11) is also expected to slow down: overall PPI to 1.3%, and core PPI to 2.0%.
As we can see, the forecasts of most analysts are unfavorable for the greenback—if the inflation reports come in at or below the forecast figures, EUR/USD buyers could arrange a correction, pushing the price back into the 1.1000 zone. However, there's another side to this scenario. The market is expecting further inflation deceleration. So, if the reports come in stronger than expected (in the "green zone"), the spring will uncoil in the opposite direction. In that case, the US dollar will strengthen across the board, and sellers will likely test the support level at 1.0930 at the very least.
As for the euro, the fundamental backdrop has turned rather bleak. It is now safe to say that the European Central Bank will cut interest rates at the October meeting, given the slowdown in inflation and weak economic growth in the Eurozone. Not long ago, many experts confidently predicted that the next round of monetary easing wouldn't occur until December. Similar statements were made by some ECB policymakers, including Peter Kazimir and Gediminas Shimkus. However, recently, ECB members have noticeably softened their stance. For example, ECB Governing Council member (and head of the Bank of France) Francois Villeroy de Galhau explicitly said yesterday that interest rates will be cut at the October meeting. The likelihood of this scenario is estimated to be around 80-90%.
Thus, the current fundamental background supports further declines in EUR/USD toward the 1.0930 support level (the middle line of the Bollinger Bands indicator on the daily chart). However, the stronger bearish momentum will be needed to break into the 1.08 level. This task could be fulfilled by inflation reports if they exceed forecasted levels. Until these releases (Thursday-Friday), it is advisable to consider short positions on corrective pullbacks, with the main target (for now) being 1.0930.
