US CPI Reinforces Fed Cut Expectations; ECB Holds Steady

US inflation data and the European Central Bank’s (ECB) latest decision offered mixed signals to global markets on Thursday, with investors recalibrating expectations for central bank policy paths.

US CPI Adds to Rate-Cut Expectations

The August US Consumer Price Index (CPI) showed a modest pickup in inflation but remained largely within market expectations:

• Headline CPI MoM: +0.4% (July: +0.2%)
• Headline CPI YoY: +2.9% (July: +2.7%)
• Core CPI MoM (ex-food & energy): +0.3%
• Core CPI YoY: steady at 3.1%

Although inflation is still above the Fed’s 2% target, the figures were broadly in line with forecasts, keeping investors confident about rate-cut prospects later this year. Some analysts even suggest that the Fed could tolerate inflation stabilizing closer to 3% as a “new normal” in the post-pandemic era.

At the same time, recent softness in labor market data—including weaker nonfarm payrolls—has reinforced expectations that the Fed will begin an easing cycle at its September policy meeting.

The US dollar traded mixed as markets had largely priced in the data, while US equities extended gains, reflecting optimism that monetary easing remains on track.

ECB: Rates Steady, No Predetermined Path

Across the Atlantic, the ECB kept policy rates unchanged as expected. The central bank noted that the eurozone economy has shown resilience, while inflation projections point to a gradual return toward target:

• 2025 inflation forecast: 2.1%
• 2026 forecast: 1.7%
• 2027 forecast: ~1.9%

The ECB emphasized a “meeting-by-meeting” and “data-dependent” approach, refusing to commit to a preset rate path. Markets interpreted this as a cautious stance, dialing back expectations for aggressive easing.

Traders now see a lower probability of more than one cut in the current cycle, with the timing of any additional move in 2025 highly uncertain.

Market Takeaway

The dual signals highlight a divergence in policy outlooks: the Fed appears on the cusp of easing, while the ECB remains hesitant to commit beyond its current pause. This policy contrast is likely to remain a key driver for the euro, dollar, and bond markets in the months ahead.

EURUSD, H4 Chart | Source: Ultima Market MT5

The EURUSD pair has largely traded sideways in recent sessions, with price action after Thursday’s events suggesting that policy divergence may continue to lend support to the euro.

From a technical perspective, however, the pair faces a key resistance zone at 1.1740–1.1800. A decisive break above this range could open the door for a further leg higher, while failure to clear the level may keep the pair trapped in its consolidation phase.

Disclaimer

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