On one hand, the report met expectations, as predicted by most experts. On the other hand, the significance of this report is hard to overestimate given the current circumstances. The likelihood of a European Central Bank (ECB) rate cut at the October meeting has increased substantially, whereas previously, attention was focused on the December meeting. This report hit the single currency, including against the greenback. The EUR/USD pair has exited the 1.1080-1.1190 range (where it had been trading for the past two weeks) and is heading towards the support level of 1.1040 (the upper boundary of the Kumo cloud on the daily chart).
According to the published data, the Consumer Price Index (CPI) in the Eurozone decreased to 1.8% year-over-year in September. This is the weakest growth rate since May 2021. It's also worth noting that this component has shown a downward trend for the second consecutive month.
The core index, which excludes energy and food prices, slowed to 2.7% year-over-year. This indicator declined for the second consecutive month, although not as rapidly as the overall CPI. Nonetheless, September marked the weakest growth rate since April this year.
The report's structure indicates that the cost of services increased by 4.0% year-over-year in September, following a 4.1% rise in August. While the figure remains high, the trend itself is important. Inflation in the services sector is a "headache" for the ECB, so the downward trend in this indicator plays a significant role.
It was also reported that energy prices dropped by 6% in the previous month (compared to a 3% decrease in August), while industrial goods rose by 0.4% (the same as last month). Prices for food, alcohol, and tobacco increased by 2.4% (up from the previous figure of 2.3%).
It should also be noted that inflation in France and Spain fell below the 2% target as of the end of September. For instance, in France, consumer prices increased by 1.5% year-over-year last month after rising by 2.2% in August, and in Spain, they rose by 1.7% (compared to 2.4% in August).
These figures indicate that the ECB may reduce the interest rate again as early as this month. To get a complete picture, it's worth recalling other macroeconomic indicators reflecting European entrepreneurs' growing pessimism. The PMI, IFO, and ZEW indices have entered the "red zone," worsening the euro's situation.
Even before the release of the aforementioned inflation data, experts from HSBC and BNP Paribas estimated the likelihood of the ECB cutting rates by 25 basis points at the October meeting at 80%. I believe that now the number of supporters of this scenario will increase, especially considering a recent insider report from Reuters, according to which the issue of lowering rates in October "remains on the agenda" and is actively being discussed by members of the ECB. According to HSBC analysts, the ECB will move in 25-basis-point increments at each meeting until April 2025, meaning over the next five meetings.
Amid rising dovish expectations regarding the ECB's future actions, the euro has come under substantial pressure, including against the greenback.
But can we say that EUR/USD buyers are doomed? I think not because the dollar also faces a "Nonfarm Payrolls test." At stake is a potential 50-basis-point rate cut by the Federal Reserve at the November meeting. Last week, the likelihood of this scenario was 60%. As of today, that probability has dropped to 30%. However, if the U.S. labor market disappoints again, showing signs of a slowdown, the greenback will come under heavy pressure. The Nonfarm Payrolls report has now taken on more importance than inflation reports, considering the recent statements by Fed officials. Therefore, a disappointing outcome in Friday's report could fundamentally change the outlook for the EUR/USD pair.
Given the vulnerability of the U.S. dollar, entering short positions now is risky. Moreover, Tuesday's ISM manufacturing index disappointed dollar bulls by remaining at 47.2 in September, against a weak forecast for a rise to 47.6. Not only did the index stay in contraction territory, but it also didn't move (it was at the same level in August).
In my opinion, EUR/USD bears could, out of momentum, push the pair down a few dozen more points—to the target of 1.1040 (the upper boundary of the Kumo cloud on the daily chart), but further sustained decline is highly questionable, mainly due to Friday's Nonfarm Payrolls report, which could play a critical role for the U.S. dollar.
