EUR/USD to drift lower before a larger storm later this week

EUR/USD is hovering around 1.22 as bank holidays in the US and the UK allow the euro to recover from Friday's storm, but there are reasons to resume its falls. Yohay Elam, an Analyst at FXStreet, explains why bears are ready to take over.

US economic strength, variant concerns and China's cooling may weigh on the euro

“The US economy is heating up – the Core Personal Consumption Expenditure (Core PCE), surged to 3.1% yearly. The Federal Reserve prefers this inflation gauge over others, and an increase well above the bank's 2% target may raise concerns that price increases are more than ‘transitory.’”

“It seems that Europe's catch-up vaccination campaign is already priced into the euro. What about the potential damage from COVID-19 variants? While sterling has been grappling with concerns that its reopening may be delayed, the common currency has yet to price such a road bump.” 

“Later in the day, Germany releases its preliminary Consumer Price Index (CPI) estimate for May, which will likely show an increase of core inflation to 2.4% yearly. While that may alarm the country's hawks, it will also serve as a stark reminder that the old continent's price rises are well behind those in America. The European Central Bank is unlikely to tighten its policy anytime soon.”

“Another factor that may push the pair lower is subdued Chinese growth. The world's second-largest economy reported that its Manufacturing Purchasing Managers' Index hit 51 points in May, weaker than estimated. Worries about slower global growth could boost the safe-haven dollar.”