Forex News

• EUR/USD attracts buyers as the US Dollar retreats to a one-week low.
• Dovish comments from Fed Governor Waller reduce expectations of a September rate hike.
• The ECB is widely expected to raise interest rates by 25 basis points next week.

EUR/USD attracts buyers on Thursday as a sharp rally in the Japanese Yen (JPY), softer United States labour-market data and a pullback in US Treasury yields weigh on the US Dollar (USD). At the time of writing, EUR/USD trades around 1.1622, up roughly 0.30% on the day.

The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 99.00, near a one-week low, after reaching 99.86 on Wednesday, its highest level since August 14. Meanwhile, the benchmark 10-year US Treasury yield falls for the second consecutive day to around 4.74%, retreating from 4.81%, its highest level since October 2023.

Dovish comments from Federal Reserve (Fed) Governor Christopher Waller prompt traders to scale back bets on a rate hike this month. Waller said he is “finally seeing some signs of disinflation in recent data” and that the “rate decision in September hinges on August inflation.” He added that he would support keeping interest rates unchanged if the August data confirm recent progress.

Waller also said the Fed’s mandate is to achieve “price stability and full employment, not financial conditions,” adding that the current interest-rate setting “could get us back to 2% inflation.”

According to the CME FedWatch Tool, the probability of a rate hike at the Fed’s September 15-16 meeting has fallen to around 48% from 63% a day earlier.

Meanwhile, mixed US economic data offers conflicting signals. Initial Jobless Claims increased to 206K in the week ending August 29, slightly above the market forecast of 205K and the previous reading of 204K. However, the ISM Services PMI rose to 55.4 in August from 54.1 in July, exceeding expectations of 54.3. The Prices Paid and Employment indices increased to 72.6 and 47.8, respectively. Traders now await Friday’s Nonfarm Payrolls (NFP) report for fresh clues on the Fed’s monetary policy outlook.

Across the Atlantic, the European Central Bank (ECB) is widely expected to raise interest rates at next week’s monetary policy meeting. The move would mark the second rate hike this year as the central bank seeks to curb inflation, which has been driven largely by elevated Oil prices linked to the war in the Middle East.

A Reuters poll showed that all 65 economists surveyed expect the ECB to raise its Deposit Facility Rate by 25 basis points to 2.50% on September 10. Around 91% expect the rate to stay at 2.50% through the end of the year, while 78% see it holding at that level through mid-2027.

Brown Brothers Harriman’s (BBH) Elias Haddad reports the Swiss Franc (CHF) is the second-best performer today after the Japanese Yen as Swiss inflation surprised to the upside in August, reinforcing Swiss National Bank (SNB) hike expectations. Despite this, markets still fully price a first 25 bps hike only in June 2027, and Haddad notes current low rates and contained inflation remain a headwind for the Franc over the quarter.

Swiss inflation and Franc performance

"CHF is today’s second best performing major currency, behind JPY. Swiss inflation ran hot in August reinforcing SNB rate hike expectations."

"Headline CPI rose more than expected to 0.8% y/y (consensus: 0.5% y/y) vs. 0.4% in July. Headline inflation is the highest since September 2024 and above the SNB’s Q3 forecast of 0.6% y/y. Core CPI inflation also surprised to the upside at 0.4% y/y (consensus: 0.3%), following four straight 0.3% readings."

"That’s an ongoing headwind for CHF. CHF is the worst performing G10 currency so far this quarter."

"The swaps curve continues to fully price in a first 25bps hike to 0.25% in June 2027. The SNB has plenty of room to keep rates at 0.00% for some time, given that inflation remains well within the bank’s price stability mandate of less than 2% per annum. "

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

• The US ISM Services PMI surpassed consensus in August.
• The US Dollar remains under marked selling pressure.

Fresh data from the Institute for Supply Management (ISM) showed the Services PMI improving to 55.4 in August from 54.1 in the previous month, coming in above prior estimates at 54.3 and signalling further pickup of momentum in the sector.

Inflation pressures gathered traction, with the Prices Paid Index edging higher to 72.6 from 70.3. Hiring conditions improved marginally, with the Employment Index ticking higher to 47.8 from 47.4. Meanwhile, new business picked up extra momentum, with the New Orders Index increasing to 60.9 from 57.2.

Market reaction

The Greenback remains well offered on Thursday, motivating the US Dollar Index (DXY) to come all the way down and challenge multi-day troughs briefly below the 99.00 mark.

This section below was published as a preview of the US ISM Services PMI report for August at 09:00 GMT.

• The US ISM Services PMI is expected to improve marginally in August. 
• The US services sector should remain well into expansionary territory.
• Bets of further Fed tightening appear to have regained traction in the last few days.

On Thursday, we’ll get the latest read on the US service sector when the Institute for Supply Management (ISM) publishes its August gauge. Consensus points to a marginal improvement to 54.3 from July’s 54.1. If confirmed, the reading would reinforce the sector’s resilience and offer a modest boost to confidence in the broader economy.

Back in July, the details from that release were mixed: hiring momentum weakened, with the ISM Employment Index dropping to 47.4 (from 51.2). On the flip side, New Orders gathered decent steam, increasing to 57.2, which hinted that demand may be picking up pace. In tandem with the steady growth, the Prices Paid Index rose to 70.3, echoing the strengthening momentum of inflation pressures.

What to expect from the ISM Services PMI report?

Inflation in the US is still running hotter than the Federal Reserve’s (Fed) 2% target, and that keeps policymakers uneasy, especially amid the still unresolved crisis in the Middle East and with the full effects of US tariffs yet to filter through the economy.

The inflationary pressure in the US appears to have lost some traction in July, following the small decline in the Consumer Price Index (CPI), while Personal Consumption Expenditures (PCE) readings remained unchanged from a month before. However, Fed officials and Chair Kevin Warsh have been cautious in their latest comments, keeping the issue of (still elevated) inflation on the table and the main source of the recent pick-up in speculation surrounding rate hikes in the second half of the year. 

Against that backdrop, an ISM Services PMI that lands in line with expectations probably won’t move the US Dollar (USD) much. It would simply confirm the picture of an economy that’s still resilient but still wrestling with sticky price pressures. A softer-than-expected print, though, could shake confidence and see investors probably trimming their USD holdings on fears that growth is losing momentum.

When will the ISM Services Purchasing Managers Index report be released, and how could it affect EUR/USD?

The Institute for Supply Management (ISM) will publish the Services Purchasing Managers Index (PMI) on Thursday at 14:00 GMT.

Pablo Piovano, Senior Analyst at FXStreet, explains that the near-term outlook for EUR/USD has deteriorated since the recent break below its critical 200-day SMA in the 1.1630 region.

Against that, Piovano argues that there is a provisional support at the 100-day SMA near 1.1570, while a deeper retracement could lead to a test of the minor support at 1.1511 (August 13), ahead of the interim 55-day SMA around 1.1490.

On the flip side, “if the pair manages to reclaim the 200-day SMA, it could then attempt a move toward the August peak at 1.1711 (August 21)", Piovano adds.

“Momentum indicators also suggest that further pullbacks should remain on the cards, as the Relative Strength Index (RSI) has retreated to the 52 region, while the Average Directional Index (ADX) near 37 suggests that the current trend is quite firm”, he concludes.

TD Securities’ Ryan McKay and Bart Melek note that speculation of currency intervention and less hawkish Federal Reserve commentary have supported precious metals, with Gold moving away from nearby CTA selling triggers. They highlight upcoming US data as key for the next leg higher, while stressing that the longer-term backdrop for Gold has materially improved as Dollar debasement concerns grow.

Dollar softness supports yellow metal

"Speculation of currency intervention has weighed on the dollar, while less hawkish comments from Fed's Waller has pressured interest rates lower."

"This has given precious metals a lift higher in the morning session, seeing CTAs turn buyers in silver and palladium, while gold moves away from nearby CTA selling triggers."

"Non-farm payrolls this Friday, and inflation data next week, will be of keen interest for precious metals given the renewed hawkish tone from Fed Chair Warsh at Jackson Hole and the latest escalation in the energy market."

"With hike pricing remaining elevated amid lingering inflation concerns, timing remains the main question for the next leg higher in the yellow metal."

"That said, the longer-term landscape for precious metals has materially improved amid a renewed dollar debasement theme, and given Fed hikes are far from certain."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)