EUR/USD stays defensive near 1.0950 amid US default woes, hawkish Fed talks ahead of US inflation

EUR/USD holds lower grounds near 1.0960 as the key Wednesday’s trading begins in Asia, following a two-day downtrend. That said, the Euro pair dropped to the fresh low in two weeks the previous day amid broad US Dollar strength as markets prepare for today’s US Consumer Price Index (CPI) for April.

US Dollar Index (DXY) rose in the last two consecutive days despite unimpressive data and looming fears from the US banking sector, as well as the debt ceiling expiration. On Monday, the Fed Bank Loan Survey showed the uninspiring findings while US Senate Democratic leader Schumer recently said that House Speaker Kevin McCarthy, a Republican, refused to take default off the table.

Further, the US NFIB Small Business Optimism index dropped to the lowest level since 2013, to 89 in April. Even so, Federal Reserve Bank of New York President John Williams said, per Reuters, "Fed has not said it's done raising rates."

On the other hand, European Central Bank (ECB) policymaker Peter Kazimir said on Tuesday, “Based on current data, the ECB will have to keep raising interest rates for longer than anticipated.” On the same line, ECB policymaker Martins Kazaks warned on Tuesday, “Rate-hiking may not be finished in July.

It’s worth noting that a dearth of major data/events joined pre-inflation anxiety and hawkish Fed talks, as well as fears emanating from the US debt ceiling expiration and banking sector, to weigh on the sentiment, which in turn favored the US Dollar and lured EUR/USD sellers.

That said, Wall Street closed with mild losses whereas the US Treasury bond yields remained firmer by the end of Tuesday’s North American session.

Moving on, final readings of Germany’s inflation gauge, per the
Harmonized Index of Consumer Prices  (HICP) for April, expected to confirm 7.6% YoY forecasts, may entertain EUR/USD pair traders ahead of the all-important US CPI for the said month. Forecasts suggest a minor MoM increase in the headlines CPI and a softening in the Core CPI. However, any positive surprise or matching of the figures with the market consensus can allow the Fed to remain hawkish and the same can exert downside pressure on the major currency pair.

Also read: US April CPI Preview: How will inflation data influence Fed rate outlook?

Technical analysis

Although a triple bottom around 1.0940 highlights the levels as the key support, a daily close below the 21-DMA level of near 1.1000 keeps EUR/USD bears hopeful.