French and Spanish inflation figures surprised on the downside on Friday, coming in at 1.2% and 1.5% respectively. That is helping explain the euro’s muted reaction to China’s stock rally this morning, as markets are almost fully pricing in a 25bp European Central Bank rate cut in October, due to both those lower inflation prints and a Reuters report suggesting Governing Council doves are ramping up pressure to stay keep easing policy, ING’s FX strategist Francesco Pesole notes.

Short-term move to 1.1200 is possible in EUR/USD

“What appears clear from the latest off-meeting communication is that the hawk-dove factions are at a recent high within the ECB. Ultimately, data should be the tie-breaker for an October cut, so expect this morning’s German CPI and tomorrow’s eurozone-wide figures to trigger some EUR moves.”

“We may also get some clues from today’s speech from ECB President Christine Lagarde at the EU Parliament. We have a number of hawkish and dovish members speaking later this week, including Isabel Schnabel and Philip Lane. If we end the week with slower-than-expected eurozone inflation and somewhat weaker US payrolls figures endorsing a 50bp Fed cut, then expect the euro to be one of the laggards in a weak USD environment as markets cement bets that the ECB will continue cutting in October.”

“Another short-term move to 1.1200 is possible in EUR/USD on the back of some USD weakness, but unless we see surprisingly strong eurozone inflation, a big break higher may not be on the cards. We favour a stable 1.11-1.12 trading range in the first half of October.”