EUR/USD Hangs in Balance Ahead of Crucial US CPI Data

The EUR/USD pair experienced a modest pullback on Monday, largely due to a technical rebound in the US dollar. However, this decline was tempered by decreasing market expectations for a Federal Reserve rate hike in September, which has provided underlying support for the euro.

This decrease in rate hike expectations is reflected in the latest data from the CME FedWatch Tool, which shows that the market-implied probability of a Fed rate hike at the September meeting has plummeted to 44%. This implies that the threshold for further monetary tightening by the Fed has risen considerably, constraining the dollar's medium- to long-term upward momentum.

The euro remains within its recent rebound channel and is supported by factors such as cooling market expectations for Federal Reserve rate hikes, which have weakened the US dollar's yield advantage. Additionally, the European Central Bank (ECB) maintains a relatively hawkish policy stance compared to the Fed, providing further support for the euro.

The near-term direction of EUR/USD hinges entirely on Wednesday's U.S. CPI data, with investors eagerly awaiting its release. If inflation shows signs of cooling, the euro could advance toward the 1.1620 target; if inflation proves persistent, it may trigger a dollar rally and push the euro below 1.1500.