EUR/USD Rangebound Ahead of ECB Decision and US Inflation Data

The EUR/USD exchange rate remains driven by front-end rates and is expected to be influenced by upcoming events. The European Central Bank's (ECB) September policy decision, along with key inflation data from the United States, may determine how the pair fares. According to recent economic data surprises, the euro area has been outperforming the US.

Market pricing for the ECB rate outlook has shifted more hawkish relative to periods earlier in the conflict, implying a 90% chance of a second move by December. In contrast, policy rates in the United States remain far higher than in Europe, but the expected path of tightening from the Fed is less steep.

The correlation matrix shows a strong relationship between EUR/USD and both German-US two-year yield spreads and outright US two-year yields. Interestingly, despite continued gains in energy prices, their influence over the pair has diminished to almost negligible levels over the past week, month, and quarter.