Euro slips below 1.1650 after mixed US PCE data

Mixed July PCE data pushed the euro below 1.1650 as traders weighed whether sticky core inflation keeps the Federal Reserve on hold.

The euro slipped below 1.1650 against the dollar Wednesday after mixed July PCE data showed core inflation steady at 3.3 percent year-over-year, complicating the Federal Reserve's path toward its 2 percent target.

"The dollar needs Warsh and other Fed officials to push back against emerging debasement concerns and reinforce their commitment to returning inflation to the 2 percent target to find any significant support," OCBC analysts said.

Core PCE rose 0.2 percent month-over-month in July, matching forecasts, while headline inflation ticked up 0.1 percent after June's 0.1 percent contraction. The dollar index, down 0.75 percent on the month and more than 2.5 percent below its late-July peak, steadied as traders repositioned ahead of Fed Chair Kevin Warsh's Jackson Hole speech Friday.

The mixed reading leaves futures pricing a 38 percent chance of a quarter-point rate hike in September, down from 55 percent a month ago, according to CME FedWatch data. If core inflation stays above 3 percent, the Fed's five-meeting hold at 3.5 percent to 3.75 percent could extend into 2027, keeping the dollar bid and capping the euro's 2.5 percent monthly rally.

The euro's slide extends a pullback from three-month highs near 1.1700, where the 78.2 percent Fibonacci retracement of the May-June selloff capped upside attempts. Support now sits at the 200-day moving average near 1.1630, with a break below exposing the August 19 low at 1.1570, according to FXStreet technical analysis.

The last time core PCE held at 3.3 percent year-over-year was in July 2025, when the euro traded near 1.08 before a 4 percent rally over the following six months as the Fed signaled the end of its tightening cycle. This time, inflation's persistence above target has kept the central bank on hold since March, and Warsh's reluctance to provide forward guidance has added to market volatility, DBS Bank strategists said.

Rate Differentials Widen as ECB Stays Cautious

The policy divergence between Washington and Frankfurt remains a key driver of EUR/USD. While the Fed has held rates at 3.5 percent to 3.75 percent for five consecutive meetings, the European Central Bank has signaled a more cautious stance, emphasizing that decisions will depend on incoming data. Some analysts argue the euro's downside is limited, as the ECB may be forced to catch up if eurozone inflation remains persistent.

The dollar's resilience comes despite a broader August slide, with the DXY down 0.75 percent on the month as soft employment figures and a Treasury plan to boost repurchases of long-dated securities weighed on the greenback. The euro, meanwhile, has rallied 2.5 percent this month to near three-month highs, with the relative strength index hovering around 70, pointing to overbought conditions that leave the pair vulnerable to a pullback.

For traders, the immediate focus shifts to Warsh's remarks at the Jackson Hole Symposium on Friday. DBS strategists argue the chairman needs to spell out how a Fed without forward guidance intends to anchor expectations, how much tightening it will tolerate through long-term yields, and the policy boundary between the Fed and the Treasury. Clarity on these points is critical for investors trying to assess the evolving policy mix, they said.

A stronger-than-expected core reading would reinforce concerns about sticky inflation and limit the Fed's room to ease, while a softer print could revive bets on rate cuts and extend the euro's advance. The outcome also carries implications for dollar-denominated assets and cross-border investment flows, with a weaker euro supporting European exporters even as it raises imported inflation in the eurozone.

The data lands the same day Nvidia reports second-quarter earnings, with analysts expecting revenue near $91 billion, a 97 percent year-over-year jump. The convergence of inflation and AI-capex signals creates a critical test for equities and the dollar, with a hotter-than-expected core reading reinforcing the case for rates to stay higher for longer.

This article is for informational purposes only and does not constitute investment advice.