EUR/USD remains subdued above 1.0800 ahead of Eurozone, US inflation data

Source Fxstreet
May 31, 2024 07:52
  • EUR/USD holds the 1.0800 support with a focus on inflation readings on both sides of the Atlantic.
  • Eurozone annual HICP is estimated to accelerate while US core PCE is projected to have grown steadily.
  • Eurozone inflation data will impact the ECB’s policy outlook beyond June.

EUR/USD consolidates in a tight range above the round-level support of 1.0800 in Friday’s European session. The price action in the major currency pair is surrounded by uncertainty ahead of the preliminary Eurozone Harmonized Index of Consumer Prices (HICP) data for May and the United States (US) core Personal Consumption Expenditure Price Index (PCE) data for April, which will be published at 09:00 GMT and 12:30 GMT, respectively.

Eurozone annual headline HICP data is forecasted to have grown at a higher pace of 2.5% from 2.4% in April. In the same period, the core HICP data – which excludes volatile components such as food, energy, alcohol and tobacco – is estimated to have accelerated to 2.8% from the prior reading of 2.7%. 

Eurozone inflation data for May isn’t likely to impact market speculation for European Central Bank (ECB) rate cuts in the June meeting as it appears to be a done deal. ECB policymakers have remained comfortable with rate-cut speculation for June due to consistently easing price pressures and resumed progress in service disinflation.

However, the inflation data will provide cues about how the ECB will follow the rate-cut path beyond June. A further decline in price pressures would prompt expectations of subsequent rate cuts, while a stubborn reading could force officials to adopt a more gradual approach. Meanwhile, the majority of ECB policymakers have been emphasizing the need to remain data-dependent and have been reluctant to offer any pre-defined rate trajectory.

Daily digest market movers: EUR/USD remains subdued ahead of Eurozone, US inflation data

  • EUR/USD is poised for volatility in Friday’s European and American sessions as the inflation data is scheduled to be published. In the US, the Bureau of Economic Analysis (BEA) will report the core PCE Inflation data for April, which is the Federal Reserve’s (Fed) preferred inflation gauge.
  • Core PCE inflation is projected to have grown steadily by 0.3% and 2.8% on monthly and annual basis, respectively. Steady or hot inflation reading would likely prompt traders to pare Fed rate-cut bets for the September meeting, while soft figures would do the opposite. 
  • Currently, the CME FedWatch tool reflects that traders are indecisive about the US central bank reducing interest rates in the September meeting. The reason behind this deepening uncertainty is the strong labor market outlook and upside risks to inflation.
  • Fed policymakers emphasize the need to maintain interest rates at their current levels for long until they get sufficient evidence that price pressures will sustainably return to the desired rate of 2%. Officials worry that the progress in the disinflation process has stalled  even though the April’s Consumer Price Index (CPI) report showed that price pressures abated.
  • Meanwhile, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, is slightly up near 104.85. The USD Index gains ground after correcting sharply on Thursday. The sell-off move was driven by slower United States Q1 Gross Domestic Product (GDP) growth. the revised GDP estimates report showed that the economy expanded at a slower pace of 1.3% against the 1.6% initially estimated.

Technical Analysis: EUR/USD strives to maintain firm footing above 1.0800

EUR/USD edges down but holds the crucial support of 1.0800 ahead of US core PCE inflation data. The shared currency pair holds the breakout of the Symmetrical Triangle chart pattern formed on a daily time frame, which is in the region of 1.0800. The near-term outlook of the shared currency pair remains uncertain as it struggles to sustain above all short-to-long-term Exponential Moving Averages (EMAs).

The 14-period Relative Strength Index (RSI) has slipped into the 40.00-60.00 range, suggesting that the momentum, which was leaned toward the upside, has faded for now.

The major currency pair would strengthen if it recaptures a two-month high around 1.0900. A decisive break above this level would drive the asset towards the March 21 high, around 1.0950, and the psychological resistance of 1.1000. However, a downside move below the 200-day EMA at 1.0800 could push it further down.

Euro FAQs

The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

 

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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