EUR/USD jumps to 1.0850 as hot Eurozone HICP eases ECB’s subsequent rate-cut bets.

EUR/USD recovers strongly as Eurozone inflation turns out hotter-than-expected.
Eurozone annual headline and core HICP rose strongly by 2.6% and 2.9%, respectively
Investors await the US core PCE Inflation data.

EUR/USD jumps to 1.0800 in Friday’s European session. The major currency pair strengthens as the Eurostat has reported that annual preliminary Eurozone Harmonized Index of Consumer Prices (HICP) data grew at a faster pace than expected in May. Headline HICP rose by 2.6%, stronger than the estimates of 2.5% and April’s reading of 2.4%. In the same period, the core HICP data – which excludes volatile components such as food, energy, alcohol and tobacco – accelerated to 2.9%, from expectations of 2.8% and the prior reading of 2.7%. The monthly headline and core HICP rose at a slower pace of 0.2% and 0.4%, respectively, from their former readings.

It was expected that the 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 impact the pace at which the ECB will follow the rate-cut path beyond June. A hot inflation reading is expected to force officials to adopt a more gradual approach. Investors should note that 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.

Investors should be prepared for more volatility in the shared currency pair ahead of the United States (US) core Personal Consumption Expenditure Price Index (PCE) data for April, which will be published at 12:30 GMT.

Daily digest market movers: EUR/USD holds strength ahead of US inflation data

EUR/USD is poised for more volatility as the US core PCE inflation data, which is the Federal Reserve’s (Fed) preferred inflation gauge, is scheduled to be published.
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 rebounds a significantly from 1.0800

EUR/USD exhibits a firm footing above 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.