EUR/USD advances towards 1.0650 despite higher-than-expected Fed’s favorite inflation tool

The EUR/USD pair has delivered an upside break of the potential resistance formed around 1.0630 after a long struggle. The major currency pair aims to recapture the critical resistance of 1.0650 on expectations of a further decline in United States Consumer Price Index (CPI) data.

S&P500 recovered on Friday despite better-than-anticipated US Personal Consumption Expenditure (PCE) inflation data. The headline inflation indicator was released at 5.5%, higher than the expectations of 5.3% but lower than the prior release of 6.1%. Investors are expected to keep the focus on the decline, no matter the extent, as it has cemented further reduction in the inflationary pressures in the United States. This has also improved the risk appetite of investors.

Meanwhile, the US Dollar Index (DXY) is displaying signs of volatility contraction ahead amid its lackluster behavior. The USD Index is hovering in a 10-pip range amid an absence of potential triggers this week. Also, the 10-year US Treasury yields are oscillating around 3.75%.

A gradual decline in the pace of inflation is cementing slower interest rate hikes by the Federal Reserve (Fed). Undoubtedly, the Fed will keep interest rates solid for a long time as the inflation rate is still significantly higher and will demand ‘blood and sweat’ from Fed policymakers. Also, a contraction in demand for durable goods in the United States economy has supported consensus for lower inflation ahead.

On the Eurozone front, European Central Bank (ECB) Governing Council member, as well as Dutch Governor Klaas Knot, sees more policy tightening in the five policy meetings between now and July 2023 to tame firmer inflation. Earlier, ECB policymakers advocated that the central bank has done much in tightening the monetary policy. However, ECB Knot believes, ' The risk of us doing too little is still the bigger risk’.