EUR/USD continues to trade higher around 1.0730, US CPI, ECB decision eyed

• EUR/USD extends gains on the pullback in the US Dollar (USD).
• Investors await US CPI, seeking valuable insights into the inflation outlook.
• Euro’s strength could be limited as the ECB is expected to keep interest rates unchanged.

EUR/USD extends the previous session’s gains, trading higher around 1.0730 during the early hours of the European session on Monday. The pair is experiencing upward support due to the pullback in the US Dollar (USD).

US Dollar Index (DXY) beats lower around 104.60, continuing to extend losses despite the positive performance of United States (US) Treasury yields. The yield on the 10-year US Treasury bond improved to 4.29%, up by 0.52% at the time of writing.

The Greenback is anticipated to remain strong, reinforced by positive economic data coming from the US. Investors will likely watch the upcoming release of the US Consumer Price Index (CPI) data for August, scheduled for Wednesday.

This data has the potential to offer additional insights into the country's inflation situation, which can significantly influence the investors’ decisions regarding placing trading positions on the EUR/USD pair.

US Treasury Secretary Janet Yellen, while returning from the G20 Summit on Sunday, advocated the United States' capacity to control inflation without causing harm to the employment market. Yellen further mentioned that "Every measure of inflation is on the road down."

Investors have been factoring in the expectation of a 25 basis point (bps) interest rate hike by the Fed in either the November or December meetings. Additionally, the Fed is expected to maintain higher interest rates for an extended duration. This hawkish stance from the central bank could potentially limit the upside potential for the EUR/USD currency pair.

The Fed Governor Christopher Waller has mentioned that the Fed has some leeway to increase interest rates, but these decisions will be driven by economic data. Meanwhile, Fed Boston President Susan Collins has highlighted the potential risks associated with an overly restrictive monetary policy stance and advocated for a patient, careful, and deliberate approach to policy decisions.

Additionally, Chicago Fed President Austan Goolsbee has outlined the central bank's objective of guiding the economy onto a "golden path." This path represents a situation where inflation decreases without triggering a recession, a delicate balance that central banks aim to achieve to maintain economic stability and growth.

On the other side, the European Central Bank (ECB) is likely expected to keep interest rates unchanged at its upcoming policy meeting scheduled for Thursday. Recent data released from Germany on Friday showed that the Harmonised Consumer Price Index (HICP) for August came in at 6.4% year-on-year, meeting market expectations. While the core Consumer Price Index (CPI) remained stable at 6.1%.

The Euro was possibly undermined after China published weaker-than-expected Consumer Price Index (CPI) for August on Saturday. The CPI report showed a rise of 0.1% on an annual basis, falling short of market expectations of a 0.2% reading. However, the consumer prices improved from the previous month's figure of -0.3%.

Traders are expected to gain a deeper insight into China's economic conditions by observing the obstacles that authorities are grappling with. The market expects further monetary and fiscal measures aimed at achieving Beijing's objective of attaining 5% GDP growth for the current year.