EUR/USD Tests Key Support as Fed Strength Offsets Rising Eurozone Inflation Expectations

The EUR/USD currency pair has been testing its key support zone around $1.1480, as the Federal Reserve's recent interest rate hike and strong economic data offset rising eurozone inflation expectations.

On September 18, the Fed raised rates by 25 bps to a 3.75-4.00% range, citing elevated inflation and solid economic activity. The U.S. Consumer Price Index accelerated to 3.4% year over year in August, while the Producer Price Index rose sharply to 5.4% year over year.

The European Central Bank is also facing pressure from rising eurozone inflation expectations. Final August inflation was revised slightly lower but still accelerated to 3.2% from 2.9% in July. ECB Consumer Expectations Survey data showed one-year inflation expectations rose to 3.0%, three-year expectations increased to 2.9%, and five-year expectations climbed to 2.5%.

The interest-rate differential remains in favor of the dollar, but rising inflation expectations reduce the ECB's room for a softer policy stance. Macroeconomic data from Germany and France is mixed, with industrial production falling in Germany and exports declining, while factory orders increased and business confidence improved in France.