EUR/USD bulls return below 1.1000

• The EUR/USD pair is in limbo as the dollar rises.
• ECB and Fed sentiment is the driving force.

He EUR/USD it rallied on the back of the US Consumer Price Index and hit a high of 1.1006 on the day from a low of 1.0941.

US CPI and implications for the Fed

Headline CPI growth in the US eased to 4.9% in April, from 5% in March. “Core” inflation, excluding food and energy, also moderated, to 5.5%, from 5.6% in March. “April core CPI prices suggest that core inflation is likely to remain stable ahead of the June Federal Open Market Committee meeting, supporting our view that a final 25 basis point rate hike through 5.25%-5.50% is still on the table.” However, we also acknowledge that the FOMC’s decision has become especially data dependent as activity and banking data has become more important on the dashboard. Fed managers after the SBV”.

In short,” say RBC Economics analysts, “inflation trends in the US continue to point in the right direction, but they still have a long way to go before reaching the 2% target set by the fed”.

“Labor market conditions continue to look solid, but show cracks beneath the surface, and tensions persist between regional bank credit markets.”

We believe the Federal Reserve will increasingly have to balance the risks between sticky inflation and slowing growth momentum and tightening financial conditions. We continue to expect last week’s move to be the last of this cycle, leaving the Fed on hold until later this year,” the analysts argued.

In this sense, analysts from Brown Brothers Harriman pointed out that “expectations for easing by the Federal Reserve are beginning to be reduced.”

Early last week, the swap market was pricing in a 12-month Fed Funds range of 4.0-4.25%. Previously, the range was between 3.5 and 3.75%, but now it has returned to the range of between 3.75 and 4.25% over 12 months. Earlier this week, three cuts were expected between now and the end of the year, but the probabilities of a third rise have fallen to 60%,” the analysts explain.

That being said, market expectations of a Fed turnaround are wrong and need to be repriced. Fed officials are likely to continue to oppose this dovish stance, but it will all depend on the data.”

The ECB in the spotlight

Meanwhile, the European Central Bank was slower to start raising rates, so there is a consensus that the ECB should pause later. The ECB cut the hike to 25 basis points in May, but suggested further rate hikes should be expected. “We continue to expect two more increases of 25 basis points, with a terminal deposit rate of 3.75%,” say RBC Economics analysts.

A further slowdown in bank credit is expected to affect business investment in particular, so we have lowered our growth forecasts for the euro area for the second half of this year and for 2024,” the analysts added:

But this is not expected to prevent the ECB from making further rate hikes in the near term.” In its May statement, the ECB hinted that multiple rate hikes were needed to ensure monetary policy was tight enough, in line with our request for a tightening of another 50 basis points”.