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EUR/USD recovers the 1.0800 level awaiting economic data from the US and the Eurozone

  • EUR/USD rises slightly above 1.0800 even as stubborn US PPI exacerbates uncertainty over Fed rate cuts in September.
  • US annual PPI for April meets estimates and monthly numbers beat consensus.
  • The Eurozone price index is on track to return to 2%, while services inflation slows to 3.7%.

The EUR/USD pair advances slightly above the 1.0800 round resistance in the American session on Tuesday. The pair strengthens even though United States (US) April Producer Price Index (PPI) data remains reluctant. The US Bureau of Labor Statistics (BLS) shows that the monthly headline and core PPI grew strongly by 0.5% versus expectations of 0.3% and 0.2%, respectively. On an annual basis, the headline and core PPI grew in line with estimates of 2.2% and 2.4%, respectively.

The hot PPI numbers are expected to undermine investor confidence that the Federal Reserve (Fed) will begin cutting interest rates starting at its September meeting. For clarity, investors will focus on the US Consumer Price Index (CPI) for April, which will be released on Wednesday.

Daily Market Movement Summary: EUR/USD Extends Uptrend Following US PPI Release

  • EUR/USD aims to settle above the crucial resistance of 1.0800. Major currency pair extends bullish trend while US dollar falls despite a better-than-expected US PPI report, which has raised concerns over strong speculation that the Fed will begin cutting rates of interest from the September meeting. The US Dollar Index (DXY), which tracks the value of the Dollar against six major currencies, falls to the crucial support of 105.00.
  • For clarity, investors will focus on consumer inflation data for April. Data on consumer inflation in the United States will be the main event of the week. The US CPI remained above forecasts in the first quarter of the year due to tense labor market conditions and strong household spending. Therefore, investors will focus on it as the continuation of the release of hot readings will force traders to trim Fed rate cut bets in September. The inflation data will also offset the Fed's optimism about lowering rates, based on the easing of the labor market.
  • Across the Atlantic, investors await preliminary Eurozone Gross Domestic Product (GDP) data for the first quarter, which will be published on Wednesday. GDP growth is expected to have increased at a steady pace. Stable quarterly and annualized GDP growth is forecast at 0.3% and 0.4%, respectively. Rising GDP growth would relieve policymakers at the European Central Bank (ECB), who plan to start lowering interest rates from the June meeting.
  • Price pressures in the eurozone economy are on track to return to the desired rate of 2%, as services inflation, which remained constant at 4% in the November-March period, fell sharply to 3.7 % in April. Financial markets have anticipated that the ECB will reduce interest rates by 70 basis points (bp) this year.

Technical Analysis: EUR/USD Sees Rises Above 1.0800

The EUR/USD pair is trading near the 1.0800 round resistance. The 200-day EMA near 1.0800 is acting as a strong barrier for the Euro bulls.

However, the major currency pair is on its way towards the bearish frontier of the symmetrical triangle pattern formed on a daily time frame, which is drawn from the December 28 high around 1.1140. The ascending edge of the triangle is marked from the October 3 low at 1.0448. The formation of the symmetrical triangle shows a sharp contraction in volatility.

The 14-period RSI is oscillating within the range of 40.00-60.00, suggesting indecision among market participants.

Inflation FAQ

What is Inflation?

Inflation measures the rise in prices of a representative basket of goods and services. General inflation is usually expressed as a month-on-month and year-on-year percentage change. Core inflation excludes more volatile items, such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the target level of central banks, which are mandated to keep inflation at a manageable level, typically around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the variation in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage of inter-monthly and inter-annual variation. Core CPI is the target of central banks as it excludes food and fuel volatility. When the underlying CPI exceeds 2%, interest rates usually rise, and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually translates into a stronger currency. The opposite occurs when inflation falls.

What is the impact of inflation on currency exchange?

Although it may seem counterintuitive, high inflation in a country drives up the value of its currency and vice versa in the case of lower inflation. This is because the central bank will typically raise interest rates to combat higher inflation, attracting more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Gold was once the go-to asset for investors during times of high inflation because it preserved its value, and while investors often continue to purchase gold for its safe haven properties during times of extreme market turmoil, this is not the case. most of the time. This is because when inflation is high, central banks raise interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity cost of holding Gold versus an interest-bearing asset or placing money in a cash deposit account. On the contrary, lower inflation tends to be positive for Gold, as it reduces interest rates, making the shiny metal a more viable investment alternative.

Source: Fx Street

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