The EUR/USD pair edged lower to around 1.1725 during Friday’s Asian session, weighed down by renewed US Dollar (USD) strength. Still, downside momentum may remain limited as traders increasingly anticipate a Federal Reserve (Fed) rate cut next week. Focus now turns to Germany’s August Harmonized Index of Consumer Prices (HICP) and the University of Michigan Consumer Sentiment Index, both due later in the day.
On Thursday, the European Central Bank (ECB) left interest rates unchanged at its September meeting, keeping the deposit facility rate at 2.0%. Policymakers struck an upbeat tone on growth and inflation despite ongoing uncertainty fueled by US President Donald Trump’s aggressive tariff policies. The steady stance tempered expectations for further easing, with markets scaling back bets on additional cuts.
According to Reuters, money markets now price in roughly a 40% chance of one more ECB rate reduction by next spring—lower than before the meeting. This shift has led traders to believe the central bank may be finished with its cutting cycle, potentially providing some support for the euro in the near term.
Meanwhile, across the Atlantic, a jump in US Initial Jobless Claims and a mild pickup in inflation reinforced expectations of Fed easing. Markets have fully priced in a September cut and now see three rate reductions in 2025, compared to just two projected weeks ago. Fed Chair Jerome Powell and fellow policymakers have maintained a dovish tone despite tariff-related inflation risks, a stance that could pressure the dollar and offer a tailwind to EUR/USD going forward.
