EUR/USD edges higher above 1.0850 ahead of US ISM PMI data

■  EUR/USD gains traction near 1.0850 in Monday’s early Asian session.

■  Markets believe the Fed needs more evidence to gain confidence that inflation is on course to its 2% target. 

■  The European Central Bank (ECB) is widely expected to cut the rate on Thursday. 

The EUR/USD pair extends the upside around 1.0850 on Monday during the early Asian session. The cooler US PCE inflation data and the better-than-expected Eurozone HICP inflation data provide some support for the major pair. The US ISM Manufacturing PMI for May will take center stage on Monday ahead of the European Central Bank interest rate decision on Wednesday.  

The Commerce Department's Bureau of Economic Analysis revealed on Friday that US inflation, as measured by the Personal Consumption Expenditures (PCE) Price Index, rose 0.3% on a monthly basis, as expected in April. On an annual basis, the PCE figure held steady at 2.7% YoY in April, matching March's increase and coming in line with the estimation.

The Core PCE Price Index, which excludes volatile food and energy prices, rose 2.8% on a yearly basis, in line with the market consensus. Core inflation was at its lowest level since March 2021. However, the recent data was not sufficient to trigger the Fed rate cut expectation, as investors believe the Fed needs more evidence to gain confidence that inflation is on course to reach its 2% target. 

The hotter-than-expected inflation in the Eurozone might not stop the ECB from cutting interest rates this week, but it may signal a halt in July and slower rate reductions in the coming months. Financial markets have priced in nearly 25 basis point (bps) ECB rate cuts in June and 57 bps cuts in 2024, according to Reuters. Traders will closely monitor Lagarde's press conference for fresh signals on the pace of rate cuts after June. Any dovish message from the ECB is likely to weigh on the Euro (EUR) and create a headwind for the EUR/USD pair.