The EUR/USD pair once again tested the support level at 1.1580 (the middle line of the Bollinger Bands indicator on the D1 timeframe) following an unsuccessful attempt to consolidate in the area of the 16 figure. Sellers of EUR/USD attempted to breach 1.1580 back on Friday, reacting to the resonant speech by Federal Reserve Chair Kevin Warsh at Jackson Hole and the revised employment data. Despite the impulsive price drop, bears were unable to push through this price barrier — Friday's trading ended at the 1.1582 mark. On Monday, buyers took the initiative on the pair, updating the local high to 1.1621. However, even the bullish scenario quickly ran out of steam. The published inflation growth data from the Eurozone on Tuesday played a significant role in this. The contradictory release did not support the European currency, instead favoring EUR/USD sellers.

At first glance, the report appears quite hawkish. Overall inflation in August accelerated to 3.3% year-on-year, after rising to 2.9% the previous month. The index was once again above the psychologically significant 3% mark, reaching its highest level since September 2023. Isn't this a reason to strengthen hawkish expectations regarding further actions from the ECB?

However, as the saying goes, the devil is in the details — the report's structure explains the negative market reaction (for the euro).

The main issue for the euro is that the energy component almost entirely drives the acceleration in overall inflation for August. The rate of increase in energy prices accelerated to 14.3% year-on-year in August (up from 10.3% in July). In comparison, services, which have the largest weight in the Eurozone's consumer basket (approximately 47%), saw growth slow to 3.0%, down from 3.3%. Prices for non-energy industrial goods increased from 0.9% to 1.2%, while food, alcohol, and tobacco maintained their July growth rate of 1.2%.

The dynamics of core inflation are even more telling. The core index, which excludes energy, food, alcohol, and tobacco, fell to 2.4% from the previous 2.5%. Most analysts were confident that this indicator would remain at July's level in August.

A broader indicator — excluding energy and unprocessed foods — slowed to 2.1%. This figure is often referred to as "core" inflation, as it excludes not only energy resources but also fresh food items (vegetables, meat, fish), whose prices largely depend on seasonality and weather conditions.

In other words, the inflationary impulse in the Eurozone (for now) is not spreading evenly throughout the economy — it is concentrated primarily in the energy segment. For the European Central Bank, this is a significant, arguably decisive moment, as sustained inflationary pressure typically manifests more in rising prices for services, wages, and other components of domestic demand than in increases in oil and gas prices. These factors can keep inflation elevated even after stabilization or declines in energy prices. If the overall CPI acceleration is primarily attributable to an external energy shock, the ECB may view the spike as a temporary effect rather than as evidence of persistent price pressure in the economy.

This is precisely why the market did not find sufficient "concrete" grounds in the report to reassess expectations toward a more aggressive pace of ECB tightening.

Moreover, a September interest rate hike is already largely priced into the quotes. Therefore, for the euro, it is more important not just the fact of a hike at the upcoming meeting, but also the prospects for further monetary policy tightening. The structure of the report allows the ECB to limit itself to just one additional hike, as long as the energy shock drives overall inflation but does not lead to an acceleration in core price processes.

By the way, the report resonates with the German data published on Monday. Overall inflation in Germany accelerated from 2.8% to 2.9%, but it was still below the 3% forecast. The harmonized index also landed in the red zone, rising to 2.9% against a forecast of 3.1%. Meanwhile, core inflation remained stable at 2.4%, and inflation in the services sector decreased from 2.9% to 2.8%. Food inflation slowed to 0.1% from 0.4%. The main driver of inflation growth in Germany was once again the energy sector: energy prices increased from 8.3% to 10.5%.

In other words, the German report effectively served as a prologue to the broader European data. In Germany, we observed an acceleration in overall inflation, stable core inflation, and a slowdown in the services sector. Today, a similar picture is evident across the entire Eurozone.

Overall, the report did not serve as the fundamental driver for the euro that it could have been had the acceleration in inflation been of a more "qualitative" nature. The rise in overall CPI remains closely linked to energy, while core inflation and services inflation continue to decline. As a result, the market did not price in a more aggressive rate-hike trajectory, allowing EUR/USD sellers to regain the initiative.

And here we return to where we started — the support level at 1.1580, which corresponds to the middle Bollinger Bands line on the D1 timeframe (and simultaneously on the W1). EUR/USD buyers have lost the initiative, yet sellers essentially failed to take advantage of the situation, unable to breach this price barrier. It is prudent to consider short positions only after bears confidently break below 1.1580 and establish themselves under this level. In this case, the next targets for the downward movement will be 1.1530 (the Kijun-sen line on D1) and 1.1500 (the upper boundary of the Kumo cloud on the same timeframe). However, if the support level of 1.1580 holds, the pair will likely return to the range of 1.1620–1.1660 (the middle and upper Bollinger Bands lines on the H4).