Euro holds gains above 1.1600 ahead of Eurozone HICP inflation data

The EUR/USD pair trades with mild gains around 1.1620 during the early Asian session on Tuesday. The US Dollar (USD) strengthens against the Euro (EUR) despite a hawkish Jackson Hole speech from Federal Reserve (Fed) Chair Kevin Warsh. Traders will take more cues from the preliminary reading of the Eurozone August Harmonized Index of Consumer Prices (HICP), which is due later on Tuesday.

Data released by the German statistics office Destatis on Monday showed that the countrys Consumer Price Index (CPI) inflation climbed to 2.9% YoY in August from 2.8% in July. This figure came in line with the market consensus and registered a third consecutive monthly increase. On a monthly basis, the CPI rose 0.2% in August, compared to 0.8% in the previous reading, softer than the 0.3% expected.

The European Central Bank (ECB) policymakers have lifted borrowing costs once and are likely to hike again at the upcoming policy meeting on September 10. Traders are betting on monetary policy being tightened further still next year.

Across the pond, hawkish remarks from the US central bank might underpin the Greenback and cap the upside for the major pair. Traders increased their bets on a September rate hike after Warsh said the Fed will “have work to do” if policymakers are not confident that underlying ‌inflation is returning to its 2% target.

Strategists at Scotiabank note that Kevin Warsh used his Jackson Hole appearance to recalibrate market perceptions of his policy stance. In their words, Warsh “used his Jackson Hole comments to correct the impression of evasiveness and opacity that characterized his remarks following the July FOMC,” helping to address concerns over communication and restore a clearer policy signal ahead of the September FOMC.

In the daily chart, EUR/USD trades at 1.1622. The pair holds a constructive bias as spot advances above the 20-period Bollinger middle band at 1.1600 and the 100-day simple moving average (SMA) near 1.1570, suggesting a supportive underlying structure after the recent recovery from the mid-1.15s. Momentum is positive, with the Relative Strength Index (14) around 57, which hints at persistent buying interest without yet reaching overbought conditions.

On the topside, immediate resistance aligns with the upper Bollinger band at roughly 1.1713, where gains could start to face profit-taking. On the downside, initial support is located at the Bollinger middle band at 1.1600, followed by the 100-day SMA around 1.1570; a deeper pullback would expose the lower Bollinger band near 1.1488 as a stronger demand area.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day.

EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy.

The ECBs primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa.

The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECBs 2% target, it obliges the ECB to raise interest rates to bring it back under control.

Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency.

A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall.

Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozones economy.

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period.

If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.