EUR/USD Range Bound Ahead of Inflation Data

The EUR/USD currency pair has been driven by front-end interest rates in recent days. The European Central Bank's (ECB) rate hike in September is fully priced into markets, with a second move heavily favored for December. Meanwhile, the US inflation data due this week may determine the fate of a potential Federal Reserve (Fed) rate hike in September.

A correlation matrix shows that the EUR/USD pair has a strong relationship with German-US two-year yield spreads and outright US two-year yields. The negative relationship between US two-year yields makes for a compelling case, especially over the short term. Despite continued gains in energy prices, their influence on the pair has diminished to almost negligible levels.

The recent economic data surprises favor Europe, with euro area data outperforming expectations by considerably more than the United States. However, this trend has rolled over in recent times, coinciding with similar price action in EUR/USD.