In the Asian trading session on Thursday (August 27), EUR/USD hovered narrowly around 1.1655, having earlier dipped to a one-and-a-half-week low of 1.1641 overnight before finding buying support. The elevated market expectations for a European Central Bank rate hike in September (priced at a 96% probability) serve as the primary support for the euro's rebound from lower levels.

ECB Executive Board member Isabel Schnabel stated on Wednesday that the prolonged Middle East conflict and surprisingly strong Eurozone economic data pose upside risks to inflation, indicating that borrowing costs need to rise further. The Eurozone economy has shown resilience, with data released last Friday revealing that business activity expanded at its fastest pace this year. Meanwhile, the US core PCE price index for July held steady at 3.3% year-on-year, with the headline PCE reading at 3.7% (above the anticipated 3.6%).

The market's pricing for an ECB rate hike in September has reached as high as 96%, reflecting a robust tightening expectation. Schnabel's comments on Wednesday made it clear that both the long-running Middle East conflict and the Eurozone's unexpectedly strong economic performance present upside risks to inflation, necessitating further increases in borrowing costs. This stance has further solidified the market's view that the ECB will maintain its hawkish policy direction.

Adding to this, the Eurozone's fundamental data offers additional support: figures released last Friday showed business activity expanding at its quickest pace since the start of the year, indicating a synchronized recovery in both demand and production momentum. According to Scotiabank, Schnabel's hawkish remarks have effectively sustained the policy backdrop's hawkish tone, reinforcing expectations for continued tightening down the line. In summary, the combination of persistent hawkish communication from ECB officials and economic resilience provides solid short-term support for the euro, giving EUR/USD some upward flexibility even with the US dollar index remaining relatively stable.

The US core PCE price index for July remained unchanged at 3.3% year-on-year, while the headline PCE rate came in at 3.7%, exceeding the consensus forecast of 3.6%; month-over-month, it rose 0.2%, also above the expected 0.1%. These figures suggest that US inflation remains notably sticky, with no signs of rapid cooling. Despite this, the CME FedWatch tool indicates that the probability of the Federal Reserve holding rates steady in September remains stable at around 64%, with limited changes in rate hike expectations.

Attention now squarely focuses on the speech by Federal Reserve Chair Kevin Warsh at the Jackson Hole symposium on Friday, which could provide further clues about the US rate outlook. His remarks are expected to be a key catalyst for EUR/USD's short-term direction: if his tone is hawkish, emphasizing inflation risks or keeping the door open for rate increases, the dollar could gain support, potentially capping the euro's upside. Conversely, if his stance is neutral or even dovish, sticking to a "less is more" approach, EUR/USD might test the 1.1700 resistance level. On the flip side, should the dollar weaken due to dovish signals, the pair could also retrace to test the 1.1600 support zone. Thus, the Jackson Hole speech not only influences the dollar itself but will also directly dictate whether the euro breaks higher or corrects in the near term.

In its latest report dated August 26, United Overseas Bank maintained a constructive short-to-medium-term view on the euro, noting that EUR/USD has shown upward momentum and could test 1.1725, with a medium-term technical target of 1.1800 to 1.1850. The bank pointed out that the euro has broken out of its recent narrow trading range, and while the upward momentum is still in its early stages, as long as the strong support at 1.1640 holds, the upside potential could expand. UOB believes that hawkish comments from ECB officials and accelerating Eurozone economic activity provide fundamental support for the euro, while cautious sentiment surrounding the dollar ahead of Jackson Hole limits its rebound. However, the bank cautioned that a decisive break below 1.1640 would warrant a reassessment of the short-term positive outlook.

ING, in its latest research note, maintains a moderately bullish stance on the euro, forecasting EUR/USD to rise to 1.17 by the end of September, reach 1.18 by the end of 2026, and target 1.20 on a 12-month horizon. The core rationale is that the Fed is likely to refrain from rate hikes throughout the year, leading to a mild dollar weakening, while the ECB still has room to hike in September, with narrowing rate differentials providing support for the euro. ING noted that current energy price volatility and geopolitical tensions in the Middle East remain short-term risks, but the overall risk-on environment favors non-US currencies. The firm emphasized that if US inflation data continues to show stickiness without prompting the Fed to turn hawkish, the euro could gradually climb amid consolidation. ING also cautioned that a breakout above 1.1700 in the short term would require further dollar weakness for confirmation; otherwise, the rebound's scope may be limited.

In summary, the expectation of an ECB rate hike in September continues to underpin the euro—with the market pricing in a 96% probability and Schnabel's hawkish tone reinforcing tightening expectations—while the Eurozone economy demonstrates resilience. US PCE data underscores inflation stickiness, with the headline annual rate at 3.7% above expectations and the core rate steady at 3.3%. The market's focus is now on Friday's Jackson Hole speech by Fed Chair Warsh, which will act as a pivotal catalyst for the euro's short-term direction. The pair may trade in a 1.1600-1.1700 range in the near term, awaiting new directional cues.

As of 14:51 Beijing time on August 27, EUR/USD was quoted at 1.1653/54.