EUR/USD Range Bound Ahead of ECB Decision and US Inflation Data

The EUR/USD currency pair has been stuck in a tight range, and upcoming events may be necessary to break it. This week's focus will be on Thursday's ECB decision and key inflation data from the US.

The pair remains driven by front-end rates, making any changes in monetary policy outlooks crucial for its direction. The correlation matrix shows a strong relationship between EUR/USD and both European and US 2-year yields, indicating that relative interest rates are driving the pair's movements.

Despite continued gains in energy prices, their influence over the pair has diminished to almost negligible levels over the past week, month, and quarter. The Citi Economic Surprise Indices suggest that euro area data outperformed expectations by considerably more than the US, potentially supporting the front-end rates influence.

The ECB's September rate hike is fully priced in, with a second move heavily favored by December. In contrast, while US policy rates are higher, the expected path of tightening from the Fed is less steep, with only just over 50% chance of a move in September.