The euro-dollar pair closed Friday's session at 1.1700 – a symbolic level, given the sharp swings in market sentiment during the week. The weekly high was recorded at 1.1820, the low at 1.1647. Formally, this round ended in favor of EUR/USD bears (since the opening price was 1.1751), but Friday's release of the core PCE index did not allow sellers to secure a convincing victory. And although, as footballers say, "the score is on the board," bearish triumphalism quieted down significantly. EUR/USD traders (as well as participants in other dollar pairs) seemed to be asking themselves: did they rush to conclusions after the publication of a strong U.S. GDP growth report?
This release indeed became the week's "mini-sensation." The point is not just that the headline figure was revised upward again (from 3.3% to 3.8%), but that the main driver of the revision was a significant upward adjustment in consumer spending. Consumption grew by 2.5% y/y, compared with the initial figure of 1.6%. What does this mean? Above all, it points to the fundamental resilience of the U.S. economy. Rising consumption is not just a data adjustment, but an indicator of strong household confidence. Moreover, the upward revision affected the category of services/durable goods, which is especially important under current conditions. These are typically the first items households cut during economic instability. Growth in this category is a clear signal that consumers feel confident.
The U.S. GDP report substantially redraws the fundamental picture for EUR/USD, as it becomes a counterweight to the Nonfarm Payrolls, which have been disappointing in recent months. The market began to discuss the possibility that the Fed no longer needs to rush to cut rates – and certainly not at an aggressive pace.
Recall that following the September Fed meeting, Jerome Powell said risks had increased for both sides of the Fed's dual mandate – the central bank must balance between persistent inflation and a weakening labor market (and economy overall). At the same time, he did not clarify which of the two goals is "prioritized": in response to questions, he limited himself to a standard phrase that the timing and pace of rate cuts "will depend on incoming data."
The strong GDP report suggested that the balance of risks has now shifted toward inflation, meaning the Fed will act accordingly – especially if key inflation indicators come in "green," accelerating more strongly than expected. Such assumptions strengthened the position of dollar bulls, and the main dollar pairs adjusted, reflecting renewed demand for the greenback. EUR/USD was no exception, falling to 1.1647 (a three-week low).
But the following day's release of the core PCE index was a "cold shower" for dollar bulls, and correspondingly, for EUR/USD bears. The Fed's key inflation gauge stood still – both month-over-month and year-over-year. It was reported that in August, the index rose by 0.2% month-over-month (m/m), as it did in July, and by 2.9% year-over-year (y/y), also as in July. All components of the release matched forecasts.
On the one hand, these results suggest that price pressures persist. In addition, the index significantly exceeds the Fed's target level. This is an argument in favor of the Fed maintaining a wait-and-see stance.
On the other hand, the key inflation indicator remains below 3%, with growth gradual and predictable. There were also opinions that the index had reached its peak and would either stay at this level or begin a slow decline.
The overall conclusion is that the core PCE index allows the Fed to implement (at least) one more rate cut before year-end.
In addition, one should not forget the August (July, June) Nonfarm Payrolls, which reflected a notable slowdown in job growth. The strong U.S. GDP report (for Q2) did not "cancel" the fact that the U.S. labor market has been cooling for several months. Incidentally, Fed Governor Michelle Bowman reiterated this point. According to her, the U.S. labor market remains fragile, and if conditions continue to worsen, "the Fed will have to adjust policy more quickly."
As a result, dovish expectations regarding the Fed's future actions have somewhat weakened, but not to the extent of enabling a sustainable dollar rally. According to CME FedWatch data, the probability of a 25-bp rate cut at the October meeting now stands at 88%, while the likelihood of an additional 25-bp cut in December is estimated at 65%. As we can see, dovish expectations remain strong, and this factor will continue to exert background pressure on the dollar – especially if the September Nonfarm Payrolls (to be released at the end of next week) once again remind traders of the fragility of the U.S. labor market, or if ISM indices (due next week as well) land in the "red zone." In such a case, the fundamental picture for EUR/USD will change instantly – and not in favor of the greenback.
Thus, in my view, we can speak only of a large-scale correction at this stage, not a trend reversal. In other words, EUR/USD purchases remain a priority, despite the temporary resurgence of interest in the dollar.
It is noteworthy that, from a technical standpoint, the pair failed to break through key support levels – neither 1.1650 (the Tenkan-sen line on the W1 timeframe) nor 1.1630 (the upper Kumo cloud boundary on the D1 timeframe). This also reflects the indecisiveness of EUR/USD bears. The nearest target for the northward move is 1.1730 (the middle Bollinger Bands line on the daily chart), the breakout of which will open the way toward 1.1780 (Tenkan-sen line on D1 and, at the same time, the lower and upper Kumo cloud boundaries on H4).
