EUR/USD retreats from three-week high towards 1.0750 as Fed vs. ECB battle intensifies

• EUR/USD prods two-day winning streak by reversing from the highest levels since late May.
• Mostly downbeat German, EU data fails to lure bears as US inflation challenges Fed’s rate hike.
• Hopes of witnessing hawkish guidance from US central bank highlights economic forecasts, dot-plot and Powell’s speech.
• Eurozone Industrial Production, US PPI may entertain Euro traders ahead of the key FOMC.

EUR/USD renews its intraday low around 1.0785 as it pares the latest gains at the highest levels in three weeks on the Fed day, i.e. Wednesday. That said, the Euro pair rose in the last two consecutive days to refresh the multi-day high to 1.0823 before retreating amid the pre-Fed anxiety. It’s worth noting that the mixed data from Germany and Eurozone joined hopes of a hawkish halt from the Federal Reserve (Fed) to prod the buyers, even if the US inflation underpins upside momentum.

On Tuesday, final readings of Germany’s inflation for May, per the Harmonized Index of Consumer Prices (HICP), remain unchanged at 6.3% YoY. Further, the German ZEW Survey unveiled that the Economic Sentiment Index offered a positive surprise in June by rising to -8.5 from -10.7 prior, versus beating the market expectation of -13.0. Though, the Current Situation Index nosedived to -56.5 from -34.8 prior, versus analysts’ estimations of -40.0. On a broader front, Eurozone ZEW Economic Sentiment Index slumped to -10.0 from -9.4, versus the market expectations of -1.5. 

On the other hand, the US Consumer Price Index (CPI) drops more-than-expected and prior releases to 0.1% MoM and 4.0% YoY. However, the Core CPI, known as the CPI ex Food & Energy, matches 0.4% monthly and 5.3% yearly forecasts. It’s worth noting that the US headline CPI dropped to the lowest since March 2021 and hence justifies the market’s expectations of the US Federal Reserve (Fed) hawkish halt, which in turn should have weighed on the US Dollar.

Following the downbeat US inflation, the CME’s FedWatch Tool suggests more than a 90% chance of the US Federal Reserve’s (Fed) no rate hike during today’s monetary policy meeting, versus around 75% chance before that.

On the contrary, the ex-Fed Officials have been pushing for a hawkish halt to the rate hikes and prod the EUR/USD buyers. On Tuesday, Former Dallas Federal Reserve Bank (Fed) President Robert Kaplan said that he would support a "hawkish pause" at this week's meeting while also adding that he would “leave the question of a July hike open.” Previously, Ex-Boston Fed President Eric Rosengren tweeted, “Expect a hawkish skip this week.”

Against this backdrop, Wall Street benchmarks rose for the second consecutive day but the US Treasury bond yields remain firmer. That said, the US 10-year Treasury bond yields rose to a 13-day high of 3.83% whereas the two-year counterpart poked the highest levels in three months with 4.70% mark before easing to 4.67% in the last hours. It should be noted that the S&P500 Futures remain indecisive of late as it portrays the market’s cautious mood.

Moving on, the pre-Fed anxiety may restrict the EUR/USD moves but the Eurozone Industrial Production for April and the US Producer Price Index (PPI) for May can entertain the Euro traders.

It should be observed that the market’s expectations of witnessing the European Central Bank’s (ECB) 0.25% are also high, which in turn marks the ECB vs. Fed divergence and keeps the Euro buyers hopeful. The same highlights the US central bank’s economic forecasts, dot-plot and Chairman Jerome Powell’s press conference for clear directions.

Technical analysis

A failure to provide daily closing beyond the 100-DMA hurdle, around 1.0810 by the press time, teases EUR/USD bears on the key day.