The EUR/USD edged lower this morning, down for the second day, ahead of the release of US CPI. The pair has been consolidating in a tight range, and yesterday’s hawkish rate hike from the ECB failed to deliver the breakout many traders were hoping to get. With the US dollar finding renewed support in recent days, the risk to the near-term EUR/USD forecast is tilted to the downside.

 

Before discussing the upcoming CPI report, as well as other macro factors influencing the EUR/USD, let’s a have a quick look at the chart first.

 

Technical EUR/USD forecast and key levels to watch

 

From a technical analysis point of view, the EUR/USD forecast hangs in the balance as the pair continues to consolidate inside a triangle, but the balance of risks remain tilted to the downside because of the energy situation. Key support comes in between 1.1560ish to 1.1580ish. Break that region and then a revisit of 1.1500 could be on the cards next. Resistance meanwhile comes in around 1.1635/40 area. Here, the resistance trend of the triangle pattern meets the 200-day average and the highs of the last several days. Break that and 1.1700 could be the next stop.

 

 

A lot will now depend on the direction of oil prices and bond yields, which are starting to provide some support for the dollar.

 

Dollar finds renewed support ahead of CPI

 

The dollar is beginning to find its footing again as the relationship between the currency and long-dated Treasury yields starts to reassert itself. The shift has come against a backdrop of rising oil prices, firmer inflation expectations and renewed pressure in the bond market.

 

The US Treasury’s latest buyback programme offers an important clue. Although the headline announcement was for $6bn, only $5.19bn was ultimately conducted. That relatively modest intervention suggests Treasury Secretary Scott Bessent remains wary of trying to lean too heavily against the bond market. A more conventional relationship between higher long-end yields and a stronger currency is easier to sustain if investors do not expect Washington to suppress borrowing costs aggressively.

 

The next test comes with today’s CPI report. Markets expect headline inflation to rise 0.4% month on month in August, taking the annual rate to 3.4%, while core CPI is expected to ease slightly to 2.4%

 

After a stronger-than-expected PPI reading, the risks are no longer quite as symmetrical. A benign CPI report would give investors some relief, particularly in equities, but a meaningful upside surprise could have a much larger market impact. With oil back above $100 a barrel and Treasury yields rising, evidence that inflation is proving sticky would make the prospect of easier monetary policy considerably harder to defend.

 

That leaves the Federal Reserve in a difficult position. Chair Kevin Warsh has set a relatively high bar for incoming data to overturn the current hawkish tone, although Christopher Waller has suggested that continued improvement in inflation could remove the need for a September move. Much has changed since those comments, however, with oil prices surging in recent days.

 

A weaker CPI reading would therefore probably hurt the dollar, but it may not be enough to unwind the broader repricing of Fed policy.

 

The euro faces a different problem

 

The ECB has meanwhile become more comfortable acknowledging the inflation risks coming from energy. Its latest projections were revised higher, while Christine Lagarde’s comments reinforced the impression that another rate increase remains firmly on the table.

 

That has changed the near-term calculus for the euro. Markets are now carrying a much larger premium for European rates, reducing the likelihood of a large drop in the EUR/USD, but much of that hawkish tone was already priced in.

 

But Europe remains particularly exposed to higher energy costs, and an extended period of oil above $100 would squeeze consumers and companies while leaving the ECB with less room to respond to weakening growth.

 

The contrast with the US is becoming increasingly important. If higher oil prices feed into US inflation while Treasury yields continue to rise, the Fed may be forced to maintain a tighter stance just as growth risks increase. That would be a much more favourable combination for the dollar.