EUR/USD Range Bound Ahead of Crucial Data Points
The EUR/USD pair is being driven by front-end rates, making it essential for traders to focus on data and events that can impact policy outlooks from both the ECB and Federal Reserve. A sparse calendar at the beginning of the week may lead to range trading before a potentially volatile end to the week, with key inflation data from the US and the ECB's September policy decision.
The correlation matrix shows a strong relationship between German-US two-year yield spreads and outright US two-year yields, suggesting that relative monetary policy outlooks are crucial for the pair. Despite continued energy price gains, their influence over the EUR/USD has diminished to almost negligible levels over the past week, month, and quarter.
The recent economic data surprises have favored Europe, with euro area data outperforming US expectations by considerably more. The gap between the two Citi Economic Surprise Indices has swung back in favor of the euro area, reflecting stronger European data and a softer patch for the US.
The ECB's rate hike this week is essentially priced in, but the tone of the policy statement, President Christine Lagarde's press conference, and updated forecasts will determine how EUR/USD fares following the decision. The market pricing for the ECB rate outlook has shifted more hawkish relative to periods earlier in the conflict, with implied pricing fully pricing a move at the Bank's September meeting and a second move by December heavily favored.