• EUR/USD rises as investors continue to price in the possibility the US economy may be slowing rapidly. 
• The chances remain high that the Federal Reserve might have to make steep cuts to interest rates, weighing on the USD. 
• The Euro gains support as interest rates in the Eurozone could stay higher for longer due to persistent wage inflation. 

EUR/USD trades higher by about a quarter of a percent in the 1.1070s on Monday, as the Euro (EUR) strengthens against the US Dollar (USD) on the back of still-high probabilities the Federal Reserve (Fed) could implement a sharp cut in interest rates at their September meeting. This, in turn, weighs on the USD because lower interest rates make it less attractive to foreign investors, lowering capital inflows. 

EUR/USD mildly higher on survival of chances of half-a-percent rate cut 

EUR/USD edges higher as traders attempt to assess the future path of interest rates in the US. The probability that the Fed could cut the fed funds rate by 0.50% – to a range between 4.75% and 5.00% – at their September 18 meeting remains above 30% whilst the chances of a 0.25% reduction is fully priced in, according to the CME FedWatch Tool. The still fairly high chance of a 0.50% “mega cut” remains a headwind for the Greenback and supports EUR/USD. 

US inflation data out on Friday showed the Personal Consumption Expenditures (PCE) Price Index remained unchanged at 2.5% in July, with core PCE still at 2.6%. Expectations had been for them both to rise a basis point. The data might have slightly eased concerns the US economy could be heading for a hard landing. Still, it will not be until US employment data comes out this week that investors will have all the “test results in for the patient” and can confidently assess what the Fed is likely to do. Friday’s Nonfarm Payrolls data for August will be particularly key in this respect.