The EUR/USD exchange rate rose briefly to its highest levels in June after official data indicated that US inflation was approaching its target and seemed to reduce pressure on the Federal Reserve (Fed) to raise US interest rates further, but the new expectations for the costs of Borrowing may disturb the market. The EUR/USD pair's gains reached the 1.0823 resistance level for a short time, before settling around 1.0788 at the time of writing.
The US dollar was sold off after the Bureau of Labor Statistics said US inflation rose 0.1% in May, pulling the annual rate down from 4.9% to 4% all the way, although its gains were quickly fading. The moderation of inflation was also less pronounced when changes in energy and food prices were set aside. Core US inflation, which ignores both the latter and is therefore often seen by central bankers as a better reflection of home-generated inflation trends, fell from 5.5% to 5.3% in line with expectations, but still sits far above the rate of core inflation
The declines in prices last month were the sharpest and widest for energy commodities such as gasoline and fuel oil, while the increases were strongest for used cars and trucks. However, inflation also rose in other basic categories including medical care, rental services, and transportation. After reviewing the data, Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote: “After rentals, the biggest contribution was basically the second consecutive jump of 4.4% in used car prices, which added 0.15% to the index.” He adds, "Such rapid headline inflation would make it difficult for the Fed to justify raising interest rates again, but we can't rule out a July hike just yet."
US short-term bond yields fell after the release and EUR/USD's rally likely reflects the market's view that the data makes further interest rate increases less likely, but the risk is that this notion is undercut as soon as Wednesday when the last Federal version. FOMC forecasts will be published.
For his part, Fed Governor Jerome Powell said in late May, “Until very recently, it was clear that more policy firmness would be needed, but as policy has become more restrictive, the risks of doing too much versus doing too little have become more balanced.” . Our policy has been amended to reflect this fact,” and “so we haven't made any decisions, but given how far we've come and as you indicated, we can afford to look at evolving data and projections and make careful assessments.”
Overall, several Fed officials have suggested in the past month that it might be appropriate to leave interest rates unchanged on Wednesday, but they stopped short of calling for an end to the tightening cycle that began last March and has since seen the federal funds rate rise. by 500 basis points, to 5.25%. “We are in a strange situation here where the rate of change is good news (inflation is going down) but the level is not great (inflation) 5.2% vs. 2.0% target).
EUR/USD forecast today:
- There is no change in my technical view of the performance of the EUR/USD currency pair.
- Stability continues around and below the psychological support level of 1.0800, confirming the bears' control over the trend.
- Technical indicators will move towards oversold levels, if the euro-dollar moves towards deeper support levels, the closest to which they are currently 1.0745 and 1.0670, respectively.
On the other hand, according to the performance on the daily chart below, a reversal of the bearish trend will not occur without moving towards the psychological resistance level of 1.1000, and this requires the weakness of the dollar, following the US Federal Reserve policy update today.
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