• Federal Reserve officials flooded the newsfeeds but failed to trigger a reaction.
  • Timid signs of European recovery fell short of boosting the Euro.
  • EUR/USD maintains a neutral tone below 1.0800, bulls add slowly.

An uneventful week ended with some more action, as choppy trading prevailed until Thursday. The EUR/USD pair seesawed in a tight range just above the 1.0700 threshold for most of the week, with the US Dollar (USD) finally giving up and extending its slide while heading into the weekly close.

In the absence of a major catalyst, market participants reacted to the United States (US) weekly employment report. Seasonally adjusted Initial Jobless Claims jumped to 231K in the week ending May 3, the highest reading since November 2023 and an increase of 22K from the previous revised level. The 4-week moving average rose to 215K, all of which suggested some loosening in the labor market, reviving hopes the Federal Reserve (Fed) may speed up rate cuts. Stocks rallied with the news, extending gains in the last trading day of the week to the detriment of the Greenback.

On Friday, the US released the preliminary May Consumer Sentiment, as measured by the University of Michigan. Consumer confidence in the US fell in May, with the Index plummeting to 67.4 from 77.2 in April. Also, the reading missed the market expectation of 76.  The Current Conditions Index declined to 68.8 from 79 in the previous month. More worrisome, 1-year inflation expectations were up to 3.5% from 3.2% previously, while 5-year inflation expectations increased to 3.1% from 3.0%.

Other than that, data was scarce, as said. The Euro was unable to take advantage of encouraging growth-related figures. The Hamburg Commercial Bank (HCOB)  released the April Purchasing Managers Indexes (PMIs) final estimates, most of which were upwardly revised. The Eurozone final Services PMI was confirmed at 53.3, while the Composite Index came in at 51.7, indicating economic expansion at the beginning of the second quarter. The EU also reported that the Producer Price Index (PPI) declined 0.4% MoM and 7.8% YoY. The monthly figure was slightly above expected, but anyway, the negative outcome came as a relief for those concerned about inflationary pressures. Finally, EU Retail Sails were up 0.8% in March, beating expectations.

Fed speakers flood the news

Meanwhile, multiple Fed speakers hit the wires throughout the week. Hawks remained hawkish, and doves repeated their cautious visions. What all of them had in common was the lack of freshness. No one was able to impress market players and trigger some action across the FX board. Overall, Fed officials reiterated that they would need more confidence in inflation easing towards the 2% goal before pulling the trigger, while the more gloomy perspectives believe there’s a risk of trimming rates too soon. At least all agree that economic progress is on a good path.

The one thing we learned this week is that market participants acknowledged that central banks will keep rates at current levels for as long as possible but are still longing for widespread rate cuts.

Inflation under the spotlight

Inflation will take centre stage next week, as the US will release the April Consumer Price Index (CPI) on Wednesday, foreseen at 0.3% MoM, easing from the previous 0.4%. During the week, the country will also release the April PPI and Retail Sales data for the same month.

Across the Atlantic, investors will be looking at the final estimate of the German Harmonized Index of Consumer Prices (HICP) on Tuesday, expected to be confirmed at 2.4% YoY, and the second estimate of the EU Q1 Gross Domestic Product (GDP) on Wednesday, previously estimated at 0.3% QoQ.  Finally, on Friday, the EU will unveil the April HICP, seen at 2.4% YoY.

EUR/USD technical outlook

From a technical point of view, EUR/USD made little progress these days, as it held below the previous weekly high at 1.0811. The pair posted modest gains for a fourth consecutive week, but bulls seem to lack conviction. EUR/USD develops below a bearish 20 Simple Moving Average (SMA), providing dynamic resistance just above the 1.0800 mark. At the same time, the 200 SMA aims marginally lower at around 1.1130, while a flat 100 SMA provides support in the 1.0630 region. Finally, technical indicators have pared their recoveries around their midlines and turned flat, in line with the absence of directional conviction.

Technical readings in the daily chart offer a similar perspective. Disregarding Thursday’s bullish run, EUR/USD remained confined to tight intraday ranges. Furthermore, a bearish 200 SMA attracts sellers around 1.0800, further reinforcing the relevance of the level. At the same time, the 100 SMA maintains its downward slope above the longer one. There are, however, modest bullish signs emerging, yet to be confirmed: The 20 SMA turned north below the current level, while technical indicators aim modestly higher within positive levels, although lacking strength enough to confirm an upcoming advance.

Beyond the 1.0810 region, bulls should find resistance around 1.0890, while beyond the latter, the next line of sellers could come in the 1.0980 - 1.1000 area. Critical support lies at 1.0700, followed by 1.0650 and the year’s low at 1.0600.

Inflation FAQs

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

 

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