EUR/USD Holds Firm Above 1.1000 Amid Declining USD Index

During the Asian session, the EUR/USD pair demonstrated a strong presence above the key psychological level of 1.1000. This robust performance is primarily attributed to a notable decline in the US Dollar Index (DXY), which has endured a three-day losing streak.

In Tokyo, S&P500 futures experienced marginal gains, indicating a positive sentiment in the US equities market. Despite the resilience of the chances for an interest rate hike by the Federal Reserve (Fed) in July, with the CME Fedwatch tool showing more than 92% probability of a 25 basis point increase, the USD Index reached a two-month low at 101.74.

The mounting pressure on the US Dollar Index stems from the belief that the impending interest rate hike, led by Fed Chair Jerome Powell, could be the final blow to the struggling currency. As labor market conditions remain tight and inflationary pressures continue to ease, the market perceives the interest rate hike as a potential catalyst for further weakness in the US dollar.

Looking ahead, market participants will closely monitor the release of the United States Consumer Price Index (CPI) data on Wednesday. The preliminary report indicates a higher monthly headline CPI growth rate of 0.3%, compared to the previous rate of 0.1%. Core inflation, which excludes volatile components such as oil and food prices, is expected to align with the headline CPI growth rate.

In the Eurozone, investors eagerly anticipate the final reading of German inflation data. The German economy is experiencing significantly higher inflationary pressures compared to other countries in the region. This divergence in inflation rates strengthens the likelihood of the European Central Bank (ECB) implementing further tightening measures in its monetary policy.

Over the weekend, ECB Governing Council member Francois Villeroy de Galhau stated that Eurozone interest rates will soon reach their peak, but emphasized that it will resemble more of a high plateau rather than a definitive peak. This suggests that the ECB anticipates a prolonged period of stable and relatively high interest rates in the Eurozone.