The EUR/USD pair surged above 1.0850 as investors remained uncertain about the European Central Bank (ECB) extending its rate-cut cycle beyond the June meeting. ECB policymakers are hesitant to promise more rate cuts due to concerns that aggressive policy easing could lead to increased price pressures. Traders have adjusted their expectations of three rate cuts to only two, as recent economic indicators indicate ongoing price pressures, such as wage growth and Preliminary Composite Purchasing Managers Index (PMI) data.
The Eurozone saw German IFO data on Business Climate, Current Assessment, and Expectations for May, which all missed estimates. Despite this, the Euro remained stable, with the IFO Business Climate Index dropping slightly to 89.3 and the Current Economic Assessment Index and Expectations Index also falling below expectations. However, the Eurozone remains unchanged.
Looking ahead, the Euro is expected to be volatile this week as Eurostat prepares to release preliminary inflation data for May, while the United States will report core Personal Consumption Expenditure Price Index (PCE) data for April on Friday. The Eurozone inflation data is closely watched as ECB policymakers are likely to announce a rate cut in their June meeting. The US Dollar is dropping in early European trading, with the US Dollar Index (DXY) falling to 104.60 as investors lose confidence in the Federal Reserve beginning to lower interest rates.
Technical analysis shows that the EUR/USD pair remains firm, consolidating around 1.0850 ahead of crucial inflation data. The pair is showing broader strength as it holds the breakout from the Symmetrical Triangle chart pattern on a daily time frame. The near-term outlook remains strong as the pair trades above all short-to-long-term Exponential Moving Averages (EMAs), although the 14-period Relative Strength Index (RSI) suggests that the upside momentum has faded for now.
In terms of economic indicators, the core Personal Consumption Expenditures Price Index (PCE) will be influential in determining market speculation for Fed rate cuts in September. The Consumer Price Index (CPI) data for April showed cooling price pressures after a hot first quarter, suggesting that the core PCE may also have softened from its prior reading of 2.7% on a year-on-year basis. Traders are expecting the Federal Reserve to keep interest rates unchanged in September, with over 50% likelihood according to the CME FedWatch tool, driven by a strong preliminary US PMI report for May.
