EUR/USD bulls found some relief on Friday as the dollar experienced broad-based selling, offering a reprieve from the pair's recent downtrend. Investors holding long positions are now hoping that Wednesday's U.S. August PCE report will align with signals from inflation rate markets, which suggest price growth is not spiraling out of control.

Indeed, U.S. inflation rate markets have been trending downward for two weeks, currently sitting closer to the midpoint of their longer-term ranges. Specifically, the U.S. 2-year

and 5-year inflation breakeven rates, along with the 2-year , 5-year , and 10-year inflation-linked swaps, are all trading within the 2.35% to 2.60% zone. While these rates remain above the Fed's 2.0% target, the longer-term trend appears to be moving in that direction.

The key data point to watch is August core PCE, which is estimated to increase to +0.3% from July's +0.2%. Should the actual result come in below estimates, U.S. interest rate investors may need to adjust their expectations for Fed rate hikes. This could cause the September 2027 SOFR futures price—a proxy for the Fed's terminal rate—to rally, while U.S. Treasury two-year yields could fall, potentially tightening U.S.-German 2-year yield spreads .

A resulting slump in U.S. interest rates could trigger dollar selling, squeezing EUR/USD shorts and pushing the pair toward key short-term resistance near 1.1550, and possibly the 200-day moving average around 1.1620.

Conversely, an above-estimate PCE reading would likely rally both interest rates and the dollar, potentially driving EUR/USD below its June and July monthly lows.
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(Christopher Romano is a Reuters market analyst. The views expressed are his own)