EUR/USD settles above 1.2200, focus shifts to EU inflation data

The EUR/USD pair rose to its highest level in more than two months at 1.2234 on Tuesday and went into a consolidation phase during the American trading hours. As of writing, the pair was up 0.6% on the day at 1.2224.

The USD's market valuation remained the primary driver of EUR/USD's movements. With the market sentiment improving during the Europen session, the greenback struggled to find demand and the US Dollar Index (DXY) slumped to its lowest level since late February at 89.69. 

Although the uninspiring performance of Wall Street's main indexes helped the USD limit its losses, the DXY remains on track to close below 90.00 for the first time since January 7.

The data from the US showed that Housing Starts in April contracted by 9.5% following March's increase of 19.8% but this reading was largely ignored by market participants. On the other hand, the data from the euro area revealed that the Gross Domestic Product (GDP) in the first quarter contracted by 1.8% as expected. 

On Wednesday, Eurostat will release the Consumer Price Index (CPI) data. Investors expect the annual Core CPI to stay unchanged at 0.8% in April.

EUR/USD outlook

“The European outlook is looking favorable. We expect a sizeable bounceback in the relative EU-US PMI differential in coming months. Such inflection points have historically seen EUR/ USD rallies," Deutsche Bank analysts said. "The euro has shown significant positive non-linearities to the interest rate differential when bund yields turn positive and if the ECB tapers ahead of the Fed, this should further help the euro.”

Regarding the EUR/USD pair's price outlook, "the trade-weighted dollar is at a big technical level: the low-end of a range that has prevailed since 2015," analysts noted. "The risks are skewed towards a break-out lower. We see EUR/ USD reaching 1.25 over the summer months."

Additional technical levels to watch for