EUR/USD Range Set to Break as ECB Decision and US Inflation Data Loom

The EUR/USD remains in a tight range ahead of Thursday's ECB decision and US inflation data, which could break it. From a day-to-day perspective, the pair is driven by front-end rates.

Market pricing for the ECB rate outlook has shifted more hawkish, with implied pricing fully pricing a move at the September meeting and a second move in December heavily favoured. In contrast, US policy rates remain far higher than in Europe, but the expected path of tightening from the Fed is less steep.

The Citi Economic Surprise Indices show euro area data has outperformed expectations by considerably more than the United States. However, this trend has rolled over recently, coinciding with similar price action in EUR/USD.

US inflation data on Friday could determine the fate of a September Fed hike, with hot readings potentially swinging markets in favour of a rate increase. If US inflation comes in below expectations, it may allow the Fed to reassess incoming data and delay a rate hike until December.