- Euro has attracted significant bids as a decline in the Fed-ECB policy divergence is widely anticipated.
- An interest rate hike by the ECB is expected despite fears of a recession in Europe.
- The energy component is expected to soften the US headline inflation while core inflation could turn out more persistent.
The Euro has driven the major currency pair closer to the round-level resistance of 1.0800 after a sharp recovery from 1.0743. The EUR/USD pair has attracted investors’ attention amid a firmer risk-appetite theme and hopes of a decline in the Federal Reserve (Fed)-European Central Bank (ECB) policy divergence.
A volatile action is expected this week from the Euro as ECB President Christine Lagarde will announce its June interest rate decision. While the scale of volatility from the US Dollar will also higher as the Federal Reserve will also announce its interest rate policy on Wednesday. But before that, heavy action is anticipated from the major currency pair ahead of the release of the United States Consumer Price Index (CPI) data (May), which will release at 12:30 GMT on Tuesday.
Daily digest market movers: Euro looks solid on hopes of a hawkish ECB policy
- The market participants are entirely focusing on the US Inflation data as it will provide significant guidance about the Fed’s policy.
- Monthly headline inflation is expected to accelerate at a pace of 0.2%, slower than the 0.4% pace being recorded for April. However, the monthly pace in core CPI that excludes oil and food prices is seen steady at 0.4%.
- Headline inflation is seen softening sharply amid a negative impact from the energy component while core CPI is expected to show persistence due to solid demand for durables and services.
- A soft reading of US CPI would bolster the case of a neutral interest rate policy announcement by the Federal Reserve as other catalysts such as Employment and economic activities are supporting the unaltered interest rate decision case.
- US Unemployment Rate has climbed to 3.7% and weekly Initial Jobless Claims have been increasing straight for the past three weeks. US Factory activities have been contracting straight for the past seven months and the service sector is hardly showing any expansion.
- Former Dallas Fed Bank President Robert Kaplan said in an interview early Tuesday, he would support a “hawkish pause” at this week’s meeting.
- Fed chair Jerome Powell announced that more interest rate hikes are less certain as tight lending conditions by United States commercial banks are barricading inflationary pressures.
- US President Joe Biden is going to announce Federal Reserve Vice Chair and will fill the vacant Fed Board seat on June 21 before the Senate Banking Committee. Fed Governor Philip Jefferson is expected to be the next vice chair, and an open Fed Board seat would be equipped by economist Adriana Kugler.
- ECB President Christine Lagarde is expected to raise interest rates by 25 basis points (bps) to 4.25% despite deepening fears of a recession in Europe.
- The final reading of the Eurozone’s Q1 Gross Domestic Product (GDP) contracted by 0.1%. led by constantly declining factory activities.
- The German economy has already registered a recession after reporting two consecutive quarters of contraction.
- An interest rate hike by the ECB and an unchanged policy stance by the Fed would trim the ECB-Fed policy divergence.
- The US Dollar Index is making efforts in defending its immediate support of 103.35 amid positive market sentiment.
Technical Analysis: Refreshes three-week high around 1.0800
The Euro is confidently driving the major currency pair higher in a Rising Channel chart pattern on a four-hour scale in which each corrective move is considered a buying opportunity by the market participants. EUR/USD has refreshed its three-week high around 1.0800, however, the 200-period Exponential Moving Average (EMA) at around 1.0800 might act as a barricade for the Euro bulls.
Buyers could show more interest if the EUR/USD manages to sustain comfortably above 1.0800. The upside bias could be ruined if the major currency pair drops below June 12 low of 1.0733.
United States Consumer Price Index (YoY)
The Consumer Price Index released by the US Bureau of Labor Statistics is a measure of price movements by the comparison between the retail prices of a representative shopping basket of goods and services. The purchase power of USD is dragged down by inflation. The CPI is a key indicator to measure inflation and changes in purchasing trends. Generally speaking, a high reading is seen as positive (or bullish) for the USD, while a low reading is seen as negative (or Bearish). Read more.
Next release: Tuesday June 13, 2023 12:30:00 GMT
Source: US Bureau of Labor Statistics
Why it matters to traders?
The US Federal Reserve has a dual mandate of maintaining price stability and maximum employment. According to such mandate, inflation should be at around 2% YoY and has become the weakest pillar of the central bank’s directive ever since the world suffered a pandemic, which extends to these days. Price pressures keep rising amid supply-chain issues and bottlenecks, with the Consumer Price Index (CPI) hanging at multi-decade highs. The Fed has already taken measures to tame inflation and is expected to maintain an aggressive stance in the foreseeable future.