EUR/USD pares losses as US Dollar retreats ahead of US PCE inflation.

EUR/USD falls below 1.1150 as softer-than-expected inflation data from France and Spain has prompted ECB rate cut prospects in October.
Flash French CPI (EU norm) and Spain’s HICP fell below 2% year-on-year in September.
Investors await the US core PCE inflation data on Friday for fresh Fed interest rate guidance.

EUR/USD recovers the majority of intraday losses and returns above 1.1150 in Friday’s European session. The major currency pair trims some of its losses as the US Dollar (USD) falls back ahead of the United States (US) Personal Consumption Expenditures Price Index (PCE) for August, which will be published at 12:30 GMT.

The inflation data will significantly influence market expectations of the Federal Reserve (Fed) interest rate outlook for the last quarter of the year. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, retreats to near 100.50 but remains inside the 100.20-101.40 range for the past two weeks. The PCE report is expected to show that core inflation rose at a faster pace of 2.7% year-on-year from 2.6% in June, with monthly figures growing steadily by 0.2%.

Currently, financial markets seem to be confident that the Fed will cut interest rates for the second straight time in November as inflation is on track to return to the bank’s target of 2% and policymakers are concerned over growing risks to labor demand. However, traders remain equally split over the potential rate cut size between 25 and 50 bps, according to the CME FedWatch tool.

Next week, investors will focus on Fed Chair Jerome Powell’s speech on Monday, a slew of labor market data, and the ISM Purchasing Managers’ Index (PMI) to project the next move in the US Dollar.

Daily digest market movers: EUR/USD recovers some intraday losses despite France, Spain inflation decelerates below 2%

EUR/USD pares some losses in European trading hours as the US Dollar falls back. While the Euro’s (EUR) performance against other major peers remains weak after the release of the flash French Consumer Price Index (CPI) (EU Norm) and the Spain Harmonized Index of Consumer Prices (HICP) data showed that price pressures grew at a slower-than-expected pace in September.
A sharp deceleration in French and Spanish inflationary pressures has prompted market expectations for the European Central Bank (ECB) to cut interest rates again in the October meeting. This would be the third interest rate cut by the ECB in its current policy-easing cycle, which started in June. The ECB reduced interest rates again in September after leaving them unchanged in July.
Annual CPI in France grew at a pace of 1.5%, sharply lower than estimates of 1.9% and the former release of 2.2%. On month, price pressures deflated at a robust pace of 1.2%, faster than expectations of 0.8%. In Spain, the annual HICP rose by 1.7%, slower than estimates of 1.9% and from 2.4% in August. On month, the HICP declined by 0.1%, which was expected to remain flat.
Going forward, investors will focus on the preliminary German and Eurozone HICP data for September, which will be published on Monday and Tuesday, respectively.