Euro in holding pattern ahead of ECB decision, US CPI next

The euro is virtually unchanged on Thursday, trading at 1.1692 in the European session.

ECB expected to maintain rates

The European Central Bank meets later on Thursday and the money markets have priced in a hold at close to 100%, which would keep the key deposit rate at 2.0%. The ECB has cut rates by more than half since last July but has hinted that there is no rush to continue lowering rates.

Has inflation in the eurozone become too much of a good thing? Inflation is under control, but there is now a risk of inflation undershooting the 2% target, which would put pressure on the ECB to respond by reducing rates.

There are differing opinions within the ECB with regard to the impact of the US tariffs. The hawks,, who are against more rate cuts argue that the economy has weathered the tariffs well. The doves, who favor more cuts, are concerned that the tariffs are yet to be fully felt and could dampen growth. The money markets are in agreement with the hawks and don't anticipate another rate cut this year.

All eyes on US CPI

The US releases the August inflation report later on Thursday. CPI is expected to rise to 2.7% y/y from 2.9% y/y in July. Monthly, the market estimate is 0.3%, compared to 0.2% in July. Core CPI is expected to remain unchanged at 3.1% y/y and 0.3% m/m.

The core rate is well above the Federal Reserve's 2% target but that isn't expected to stop the Fed from lowering rates next week for the first time since December 2024. Although a rate cut has been fully priced in, we could see downward pressure on the US dollar if the Fed cuts, especially if the Fed's tone at the meeting is dovish.

The US economy is showing signs of cooling, especially the labor market. The August nonfarm payrolls fell to 22 thousand and annual revisions for the year prior to March 2025 were revised downwards by a massive 911 thousand, much more than expected. The weak nonfarm payrolls report has raised the odds of a half-point cut to 10%, with a 90% chance of a quarter-point reduction.

EUR/USD technical

• EURUSD tested resistance at 1.1703 earlier. Above, there is resistance at 1.1722.
• 1.1674 and 1.1655 are providing support.