The EUR/USD pair has seen a strong recovery as Eurozone inflation came in higher than expected. In May, the annual preliminary Eurozone Harmonized Index of Consumer Prices (HICP) data showed a rise of 2.6% for the headline and 2.9% for the core, exceeding estimates. Meanwhile, the US core Personal Consumption Expenditure Price Index for April grew at a slower pace of 0.2%.
The Eurozone inflation data for May is not expected to impact the European Central Bank’s (ECB) decision to cut rates in the June meeting, as it seems to be already decided. However, the data will affect the pace at which the ECB will continue with rate cuts beyond June. A strong inflation reading may prompt a more gradual approach. The majority of ECB policymakers have emphasized the need to stay data-dependent and have not laid out a specific rate trajectory.
EUR/USD strengthened further as the US core PCE inflation data grew at a slower pace of 0.2% for the month. This is the Federal Reserve’s preferred inflation gauge. The US Dollar Index (DXY) fell to 104.50 as a result. However, the annual underlying inflation data rose by 2.8%, in line with estimates. The lower monthly core PCE inflation growth is not likely to lead to expectations of a rate cut by the Federal Reserve from the September meeting.
Technical analysis shows that EUR/USD is approaching the 1.0900 level after rallying to 1.0880 following the soft US core PCE inflation data. The pair is currently holding a breakout of a Symmetrical Triangle chart pattern and is struggling to sustain above all short-to-long-term Exponential Moving Averages (EMAs). The near-term outlook remains uncertain, with the RSI suggesting faded momentum towards the upside.
One of the key economic indicators to watch is the Core Personal Consumption Expenditures (PCE) Price Index, which is released monthly by the US Bureau of Economic Analysis. This index measures changes in the prices of goods and services purchased by consumers in the US and is the Federal Reserve’s preferred gauge of inflation. A high reading is considered bullish for the US Dollar, while a low reading is bearish.
In conclusion, the EUR/USD pair has seen a strong recovery due to higher than expected Eurozone inflation data and a slower pace of growth in US core PCE inflation. The impact of these developments on central bank policies and market expectations will continue to be closely monitored by investors.