- The US dollar tumbles across the board as expectations of Fed rate hikes ease.
- Despite the Eurozone inflation slowdown, ECB President Lagarde points to more rate hikes.
- The EUR/USD jumps from two-month lows to weekly highs and maintains a bullish tone.
The EUR/USD had its best performance in months on Thursday, buoyed by a weak US dollar across the board amid falling Federal Reserve (Fed) rate hike expectations ahead of the US official employment report.
Eurozone April data released confirmed a slowdown in inflation, with the headline inflation rate dropping to its lowest level in 15 months in April. The Consumer Price Index (CPI) rose 6.1% from a year ago, a slowdown from the 7% recorded in March, while the core rate dropped to 5.3%. This development alleviates pressure on the European Central Bank (ECB) to continue raising interest rates after June. ECB President Christine Lagarde noted that the bank is not pausing, stating that there is still work to do as inflation remains elevated and far from the target.
The key driver of the EUR/USD rally was a broad-based decline of the US Dollar. With Fed officials signaling that the rate is likely to hold steady in June and market participants seeing rising odds of rate cuts by year-end, Treasury yields tumbled. In addition, the improvement in market sentiment also weighed on the USD, with Wall Street indices rising sharply and the VIX collapsing 11%, helped by Chinese data, the debt-limit resolution, and easing inflation data.
The key report on Friday will be the Nonfarm Payrolls, which are expected to rise by 190K. The ADP report exceeded expectations with an increase in private payroll of 278K, compared to the expected 170K. However, the upbeat numbers did not help the Greenback. The ISM Manufacturing PMI dropped to 46.9 in May, and the Price Paid Index tumbled to 44.2 from 53.2. The combination of signals of a slowdown in inflation and weak manufacturing activity boosted Dollar’s slide.
EUR/USD short-term technical outlook
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The EUR/USD rose significantly, rebounding from monthly lows, and is currently trading above 1.0750 with a bullish tone. However, technical indicators suggest that the pair may be about to experience some exhaustion to the upside, favoring a pause or consolidation.
On the 4-hour chart, the pair is above the 20-period Simple Moving Average (SMA), with the Relative Strength Index (RSI) and Momentum flattening after a significant rally. The immediate support is seen at 1.0740; as long as the pair stays above this level, fresh highs should not be ruled out. The bullish short-term outlook will prevail as long as the pair stays above 1.0700/05 (horizontal support/20-SMA). A firm break above 1.0770 would expose the 1.0800 area, with the next resistance level at 1.0830.
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