01.10.202600:40 Forex Analysis & Reviews: EUR/USD. A Volatile Mix for the Greenback: GDP, PCE and ADP

EUR/USD updated a 16-month low on Tuesday, settling at 1.1312. A sharp rise in hawkish expectations about further Federal Reserve action drove this price action. After strong US PMI prints and fairly hawkish Fed commentary, the probability of a rate hike at the October meeting exceeded 70%. The dollar responded accordingly, strengthening across markets.

However, Wednesday's macro block cooled the dollar bulls' ardor. And although not all reports landed in the "red zone," the overall tally did not favor the greenback.

The first to take center stage was the final estimate of US Q2 GDP. According to the third, final estimate, the US economy grew 2.2% annualized in April–June, versus the prior 1.5% estimate. The number came in the green because the market had not expected a revision of the second estimate. Consumer spending was revised up (from 3.4% to 3.8%), as were domestic final private sales (from 4.2% to 4.6%).

On the face of it, this is a "perfect storm" for dollar strength: the economy is resilient, consumers remain active, and investment is growing — all supportive of stronger hawkish expectations.

But there is a catch. Alongside the upward revision to growth, US inflation dynamics were revised lower. The GDP price index was revised down to 5.6% (from 5.8%). The PCE contribution in the GDP decomposition was revised from 5.3% to 5.0%, and core PCE from 3.6% to 3.3%.

In other words, stronger economic growth came with a lower price component. For market participants primarily gauging the prospects for the Fed's next move, that signal mattered far more than the headline GDP figure.

In addition, the August inflation report came in on the soft side. Headline PCE rose 0.3% month-on-month versus a forecast of 0.4% (3.4% year-on-year). The dollar bulls were also disappointed by the Core PCE, the Fed's preferred inflation gauge: core PCE rose only 0.2% m/m, missing the expected 0.3%. July's reading was revised down to 0.1% m/m. Year-on-year core PCE remained at 3.0%, while most analysts had expected 3.3%. On the one hand, core PCE still exceeds the target, indicating persistent inflationary pressure. On the other hand, PCE inflation—especially the core measure—is not accelerating despite persistently high energy prices.

Overall, the reports indicate the US economy is still growing, but the case for further aggressive monetary tightening looks less clear than before.

The ADP report, released on Wednesday at the start of the US session, was in the green zone: private payrolls increased by 90,000 in September versus a consensus of 70,000. Even here, the market found weak spots. Job gains were concentrated in education, health care, leisure and hospitality, while financials and professional/business services showed weak dynamics. Core wage growth ran at 3.2% y/y, so the report showed no renewed acceleration in this inflation indicator.

So the prints were by no means disastrous for the dollar—many components beat expectations. Why, then, did the market focus on the weaker elements of the releases?

In my view, traders are now pricing not so much the current state of the US economy as the probability that the Fed will need to tighten policy even more—i.e., to deliver two more hikes this year. Strong GDP and ADP readings supported the dollar by confirming economic resilience. But for a new, durable dollar rally, the market needed a clear price signal—an acceleration in PCE, especially core PCE—and that signal did not appear. Moreover, GDP price components were revised down, and core PCE year-on-year stalled rather than accelerating as forecast.

As a result, traders revised their expectations for further Fed action. According to the CME FedWatch tool, the probability of a rate hike at the October meeting dropped to 35% on Wednesday, down from 72% on Tuesday/Monday. The market is now focused on December tightening, but that scenario also needs confirmation—primarily from upcoming macro data and Fed speakers' rhetoric.

However, the week's main "test" is still ahead. On Friday (2 October), the US nonfarm payrolls report for September will be released and can finally confirm or shake the current expectations around the October Fed meeting. If the market sees both a sustained rise in employment and signs of persistent wage pressure, the dollar will reassert itself—including against the euro. If NFP disappoints, Wednesday's repricing of rate expectations will gain additional fundamental support.

From a technical standpoint, EUR/USD on the 4-hour chart sits at the Bollinger Bands midline, beneath the Kumo cloud and between the Tenkan-sen and Kijun-sen lines. If buyers fail to close and hold above the Bollinger midline (i.e., above about 1.1360), the pair will likely try again to test support at 1.1310 (the lower Bollinger line on H4 and D1) and then assault the low-$1.30s. But if NFP does not favor the greenback, EUR/USD buyers will seize the initiative: in that case, the pair will return to the $1.14 area with the prospect of further gains toward resistance at 1.1470 (the upper edge of the Kumo cloud on H4).