EUR/USD treads water near highs ahead of the German CPI data

The EUR/USD pair is trading sideways on Monday, consolidating near the multi-year highs, at 1.1750 reached last week. News of progress in US trade talks with several partners is increasing hopes that major trade agreements are possible, feeding a mild appetite for risk and keeping the safe-haven US Dollar (USD) on the defensive.

Data from the Eurozone seen earlier today revealed that Germany's May Retail Sales decline unexpectedly in May, adding to the evidence of the soft economic momentum in the region's major economy. The focus now is on the June's German Consumer Prices Index (CPI) and ECB Lagarde's speech, due later today.

On Friday, US Treasury Secretary Scott Bessent affirmed that the US and China reached a deal on imports of rare earths, which concludes the agreement signed a few weeks ago and normalizes the relationship between the world's two major economies.

Apart from that, Canada announced that it rescinded the digital services tax, which caused the termination of the trade talks with the US last Friday, paving the way for the negotiations to resume.

Japanese authorities confirmed that their top negotiator, Ryosei Akazawa, will remain in the US to advance negotiations, and US Treasury Secretary Scott Bessent suggested during the weekend that tariff talks might extend until the US Labour day, on September 1, providing further leeway to reach significant agreements and boosting investors' confidence about some normalisation of the global trade scenario.

In the US, a sweeping tax bill, which is expected to add up more than $3 trillion to the US debt stockpile over the next 10 years, is making its way through the Senate. Investors' concerns about a debt crisis in the US are posing an additional weight to the US Dollar.

Daily digest market movers: Trade optimism keeps the US Dollar on its back foot

• The US Dollar (USD) remains depressed against most currencies, with the US Dollar Index (DXY) steady at levels not seen since 2022. A trade agreement with China resolving the key rare earth issue has raised hopes that the negotiations with Canada may resume. Added to this, the extension of the July 9 deadline into September has boosted investors' optimism, favouring risk-sensitive currencies to the detriment of the safe-haven USD.
• In Europe, the unexpected decline of the German Retail Sales monthly figures, which dropped 1.6% in May against market expectations of a 0.5% increase, has weighed on the Euro (EUR) rally. The common currency, however, maintains its broader positive tone intact following an almost 2% rally last week.
• Italy's Consumer Prices Index (CPI) accelerated by 0.2% in June, from the 0.1% contraction seen over the previous month, but still below the 0.3% forecasted by market analysts. Yearly inflation remained steady at 1.7% against expectations of a slight pick up to 1.8%.
• Later today, Germany's preliminary consumer prices figures for June are expected to show a slightly hotter increase, to a 0.2% monthly advance and a 2.2% year-on-year rate, from 0.1% and 2.1% respectively in the previous month.
• The US Calendar is light on Monday with only Fed Bostic and Goldsbee's speeches to mention. The market is increasingly pricing an interest rate cut in September, and their comments will be closely watched to confirm this view.
• On Friday, the US Personal Consumption Expenditures (PCE) Price Index revealed higher-than-expected price pressures in May. The headline index accelerated by a 0.1% monthly rate and to a 2.3% Y-o-Y as expected, but the core inflation rose by 0.2% and 2.7% respectively, beyond the 0.1% and 2.6% readings forecasted by market analysts.
• These data failed to dampen hopes that the Federal Reserve (Fed) will cut rates over the coming months. The CME Group's Fed Watch Tool shows only a 20% chance of a rate cut in July, but chances of an at least 25 basis points (bps) rate cut in September have risen beyond 90% from just above 60% two weeks ago.

EUR/USD resistance at 1.1750 is a key level for bulls

EUR/USD maintains its bullish trend intact after a sharp rally last week. The pair keeps consolidating gains as the 4-hour Relative Strength Index pulls back from overbought levels and price action is constrained within a 70-pip range, right below a nearly four-year high at 1.1750.

Immediate resistance is at the June 26 and 27 high, at 1.1745. Beyond here, the next upside target might be at the 161.8% Fibonacci extension level of the June 10-12 rally at 1.1795.

On the downside, the pair is finding support at the June 27 low at 1.1680. A bearish move below here would face support at the previous resistance area between 1.1630 and 1.1640 (June 12, 24, and 25 highs).