EUR/USD rises as soft US PPI boosts Fed rate-cut bets

EUR/USD rebounds strongly after the US PPI report for May turned out cooler than expected.
Fed Chairman Powell said May’s soft CPI report is encouraging but insufficient to build confidence for rate cuts.
ECB policymakers see a bumpy path towards the 2% inflation target.

EUR/USD bounces back strongly above the round-level figure of 1.0800 in Thursday’s late New York session. The major currency pair strengthens as the United States (US) Producer Price Index (PPI) report for May turned out softer-than-expected. The report shows that the monthly core PPI was unchanged, and the headline figures declined by 0.2%, while investors anticipated them to rise. Annual headline PPI surprisingly decelerated to 2.2%, while economists forecasted the data to grow strongly by 2.5% from the April release of 2.3%, upwardly revised from 2.2%. The core PPI declined to 2.3% from the estimates and the prior release of 2.4%.

Generally, producers reduce the prices of goods and services at their premises when they expect or experience a soft demand environment. This has boosted expectations of a cooling inflation outlook and has weighed heavily on the US Dollar (USD). The US Dollar Index (DXY) surrenders some of its intraday gains from 105.00.

In the European session, the shared currency pair was facing a sell-off as the Federal Reserve’s (Fed) hawkish guidance on interest rates had outplayed the soft US Consumer Price Index (CPI) data for May. On Wednesday, the Fed kept interest rates unchanged in the range of 5.25%-5.50% for the seventh straight time, as expected, and policymakers projected fewer rate cuts for this year than they expected three months ago.

Specifically, the Fed’s dot plot indicated that policymakers see only one rate cut this year against the three forecasted in March. Fed officials scaled back the number of rate cuts due to the strong labor market and stubbornly higher inflation in the January-March period. Also, they revised the year-end forecast for the core Personal Consumption Expenditures Price Index (PCE), which is the Fed’s preferred inflation measure, higher to 2.8% from March’s estimate of 2.6%.

In the press conference, Fed Chair Jerome Powell said the May’s CPI report is encouraging but also that policymakers want to see more good data to gain confidence before turning to policy normalization. Fed Powell didn’t provide any cues about Fed rate-cut timing and advocated for maintaining the current interest rate framework for a longer period. Powell added that “unexpected easing” in the labor market could force policymakers to address rate cuts early, but also that the employment outlook appears to be firm.

Before the Fed announcements, the CPI report showed that US inflation cooled in May. On the month, headline inflation steadied, and the core reading grew by 0.2%, less the estimated 0.3%. On the year, headline and core CPI decelerated to 3.3% and 3.4%, respectively.

Daily digest market movers: EUR/USD rises as ECB refuses to commit more rate cuts

Investors look for fresh cues about the French election outcome. Polls show that Marine Le Pen’s far-right National Rally has presented a strong claim for parliamentary elections but it is slightly short of having an absolute majority. Meanwhile, French Finance Minister Bruno Le Maire said that if RN gains power and goes ahead with its program, “a debt crisis is possible in France,” Reuters reported.
On the monetary policy front, European Central Bank’s (ECB)  policymakers have refused to commit to any specific rate-cut trajectory. Conversely, ECB officials have cautioned about inflation remaining persistent due to stubborn price growth in the services sector, which is mainly driven by wage growth.
This week, ECB President Christine Lagarde said in an interview that last week’s rate-cut move doesn’t commit any linear declining path. “There might be periods where we hold rates again,” she added, according to Reuters.
Supporting other ECB policymakers, Governing Council member Bostjan Vasle commented that more rate cuts are possible if the disinflation process continues. However, Vasle warned that the process could slow down as wage momentum is relatively strong.

Technical Analysis: EUR/USD aims to establish above 1.0800

EUR/USD declines to 1.0800 after posting a fresh three-day high near 1.0850. Earlier, the shared currency pair recovered swiftly after sliding to an almost five-week low near 1.0710. The near-term outlook of the major currency pair improved after it break above the Symmetrical Triangle chart formation on the daily time frame. The shared currency pair aims for a two-month high near 1.0900.

The long-term outlook of the shared currency pair remains uncertain as it hovers near the 200-day Exponential Moving Average (EMA), which trades around 1.0800.

The 14-period Relative Strength Index (RSI) finds a cushion near 40.00 and is expected to oscillate in the 40.00-60.00 range, which indicates that the current consolidation could persist.

Economic Indicator

Producer Price Index ex Food & Energy (YoY)

The Producer Price Index ex Food & energy released by the Bureau of Labor statistics, Department of Labor measures the average changes in prices in primary markets of the US by producers of commodities in all states of processing. Those volatile products such as food and energy are excluded in order to capture an accurate calculation. Generally speaking, a high reading is seen as positive (or bullish) for the USD, whereas a low reading is seen as negative (or bearish).

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