In Wednesday’s European session, the EUR/USD pair experienced a decline to 1.0830 after failing to reclaim the two-month high near 1.0900 achieved on Tuesday. The retracement comes as market sentiment turns cautious ahead of the release of key economic data, notably the Eurozone preliminary Consumer Price Index (CPI) for May and the United States (US) core Personal Consumption Expenditure Price Index (PCE) for April, scheduled for Friday.
Market participants are closely monitoring these inflation data releases as they are expected to significantly influence speculation regarding potential interest rate adjustments by the European Central Bank (ECB) and the US Federal Reserve (Fed).
The Fed’s preferred inflation gauge is projected to have increased steadily on both monthly and annual bases, with estimates suggesting a growth of 0.3% monthly and 2.8% annually.
Meanwhile, the US Dollar Index (DXY), which gauges the Greenback’s strength against a basket of major currencies, continues its recovery to 104.80. This rebound in the US Dollar is driven by a cautious market sentiment, with investors becoming risk-averse amid reduced expectations of Fed rate cuts during the September meeting. Officials have indicated a stance of maintaining interest rates at current levels until significant progress is observed in addressing disinflation. Presently, investors anticipate the Fed to initiate interest rate reductions starting from the final quarter of the year.
EUR/USD Exhibits Weakness Ahead of German Inflation Data
EUR/USD witnessed a sharp drop to nearly 1.0830 after correcting from its weekly high of 1.0890. The pair is poised to remain volatile as investors await the release of preliminary German CPI data for May, scheduled for 12:00 GMT on Wednesday.
Economists anticipate a slower growth pace for both monthly headline and harmonized inflation data in May, with expectations of a 0.2% increase. Annual Harmonized Index of Consumer Prices (HICP) is forecasted to accelerate to 2.7% from the previous reading of 2.4%. Given that Germany is the largest contributor to Eurozone’s Gross Domestic Product (GDP), German inflation data is expected to have a significant impact on the ECB’s interest rate outlook.
The ECB is widely expected to adjust its restrictive interest rate framework, maintained since July 2022. Investors are keen to ascertain the extent and pace of potential rate cuts beyond June, with ECB policymakers emphasizing a data-dependent approach.
Earlier this week, ECB policymaker François Villeroy de Galhau dismissed suggestions of a quarterly rate cut, advocating for flexibility in timing and pace. Additionally, ECB governing council member Klaas Knot advised a gradual rate-cut approach, with decisions based on quarterly economic projections. However, recent data showing elevated wage growth and improved Manufacturing PMI may challenge the projected rate-cut path based on March’s data.
EUR/USD Fails to Sustain Momentum Above 1.0900
EUR/USD encounters notable selling pressure as the US Dollar demonstrates a robust rebound. Despite breaking out of the Symmetrical Triangle chart pattern on a daily timeframe, the pair struggles to maintain upward momentum.
In the near term, EUR/USD’s outlook remains relatively firm, supported by trading above all short-to-long-term Exponential Moving Averages (EMAs). However, the 14-period Relative Strength Index (RSI) indicates a weakening upside momentum, as it falls within the 40.00-60.00 range.
