EUR/USD analysis: Attention turns to key US inflation data

EUR/USD analysis video and technical analysis on other FX majors

The EUR/USD recovered from earlier weakness to turn slightly positive on the back of further improvement in German data. Now up for the fifth week, the key question remains as to whether the EUR/USD will be able to rise more meaningfully or find resistance again around the key 1.08 handle. A lot will depend on the general direction of the US dollar, which could move once we have seen this week’s key inflation figures that are due for release in the next couple of days. FX investors are looking for clues about when the Fed may start to cut interest rates, making the upcoming PPI and CPI figures quite important in this regard. The EUR/USD analysis is currently looking positive, and the bulls would love to see weaker US inflation data this week to inspire a potential breakout above the key 1.08 resistance level.

EUR/USD analysis: German investor sentiment improves further

Sentiment towards European assets have been positive, with indices like the German DAX hitting repeated all-time highs recently, boosted by optimism that the ECB will start cutting interest rates in June amid falling inflationary pressures while recent data from the region have been pointing to an economic recovery. The positive vibes from equities space have helped to keep the risk-sensitive EUR/USD supported in the last month or so, even as rising ongoing US inflationary pressures have kept the greenback supported on the dips against the likes of the Japanese yen and other lower-yield currencies.

Today, there was more evidence of investor optimism as the ZEW economic sentiment gauge rose more than expected to in May to 47.1, up from 42.9 in April. German investors also expressed optimism about the Eurozone recovery, with sentiment probably boosted by the optimism of a rate cut and amid signs of an improving economy in China. Earlier, German CPI data reconfirmed the preliminary reading of 2.2%, supporting the view that the ECB is on track to cut rates as early as next month.

The German ZEW index has now beaten expectations in each of the last 10 months, with increasing optimism in the last 7. The improvement in investor sentiment has coincided with a gradual improvement in hard data. For example, the recently-released German GDP expanded by 0.2% in Q1, while retail sales showed a strong increase of 1.8% month-over-month. The rebound in consumer spending signals positive momentum for the broader economic recovery and indicates a potential turning point for the German and eurozone economies. As a whole, the Eurozone GDP expanded 0.3% in the first three months of the year, which was totally unexpected. With the unemployment rate remaining low, wages strong to boost consumer spending, and a more moderate inflation growth, things are finally looking brighter.

Attention turns to US inflation data, Powell

Meanwhile, the US dollar remains stable amidst subdued trading activity leading up to the release of US Producer Price Index (PPI) data today, followed by Consumer Price Index (CPI) figures tomorrow. These inflation indicators will offer insights into the potential timing of interest rate cuts by the Federal Reserve.

Persistent inflation in the first quarter, coupled with hawkish sentiments expressed by Fed officials advocating for prolonged high interest rates, have bolstered the US dollar. However, recent developments such as weaker-than-anticipated US non-farm payrolls and an increase in jobless claims have fuelled speculation that the Fed might initiate interest rate cuts as early as September.

PPI is expected is expected to print +0.3% month-over-month, following a +0.2% print last time. The year-over-year reading is expected to pick up to 2.2% from 2.1% previously. Meanwhile, core PPI is seen showing another +0.2% reading last like month, keeping the y/y rate unchanged at 2.4%.

Tomorrow, CPI is projected to ease to 3.4% year-on-year in April, down from 3.5% the previous month. On a month-over-month basis, a 0.4% increase is anticipated in headline CPI and a 0.3% rise in core CPI.

Investors are keenly awaiting the inflation data to gain a clearer understanding of when and to what extent the Fed might adjust interest rates. Currently, the market is pricing in a 63% likelihood of a minimum 25 basis point rate reduction in September.

Additionally, the remarks of Fed Chair Jerome Powell will be closely monitored for any indications regarding the Fed's stance on rate cuts. A dovish tone from Powell could further buoy the market sentiment.

EUR/USD analysis: Bulls awaiting clean break of 1.08 handle

Source: TradingView.com

Technical traders were wary of the importance of the key 1.08 handle, and ahead of the inflation data they were exercising caution as the EUR/USD bulls eyed a potential breakout. A clean break above 1.08 would invalidate the bearish trend line that has been in place since the EUR/USD peaked in December. If seen, it would also lift the EUR/USD above its 200-day average in another bullish signal. Consequently, I would then expect to see the onset of a rally towards 1.09 and 1.10 handles.

Meanwhile support is seen around 1.0750 followed by that band of prior support around 1.0695 to 1.0720 area, where the EUR/USD had formed lows around back in December and February. A clean break below this region would be a bearish technical development.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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