EUR/USD remains around 1.0080 after US CPI.

• EURUSD breaks two days of losses, regaining some ground on US dollar weakness.
• The US consumer price index grew 1.3% in May, the highest level since 2005.
• Interest rate differentials between the Fed and the ECB will give the USD an advantage.

The EUR/USD bounces back after an intraday drop below parity around 0.9997 for the first time in 20 years and is staging a recovery during the North American session on Wednesday, boosted by a US inflation report released by the US Department of Labor. US, which lifted the pair towards a daily high around 1.0122, before falling back below 1.0100. At the time of writing, EUR/USD is trading around the 1.0080 area, up 0.50%.

EUR/USD bounces off parity on US dollar weakness

Meanwhile, the US Dollar Index, which measures the value of the USD against a basket of six currencies, is down 0.30%, supported by falling US Treasury yields, and stands at 107.827. Furthermore, recession fears loom over the US 2yr-10yr yield curve, which remains inverted for the seventh day in a row, at -0.161%.

Inflation in the US exceeds 9%

On Wednesday, the US Bureau of Labor Statistics reported that the Consumer Price Index (CPI) for June beat estimates of 8.8% year-on-year and rose 9.1% year-on-year in May. As for the so-called core CPI, which excludes volatile items such as food and energy, it stood at 5.9%, less than in May but more than estimated. The main contributors to the rise in inflation were gasoline, housing and food, as the US CPI report shows.

Will the Federal Reserve raise 100 basis points?

Meanwhile, the US inflation report has fueled the possibility of a big rate hike by the Federal Reserve. Money market futures on short-term interest rates (STIRs) show that traders have fully priced in a 75 basis point rate hike for the July 26-27 meeting. However, the odds of a 100bp rate hike stand at 82%, leaving the door open for a big hike due to stickiness and persistently high inflation.

The report on inflation in Germany does not deter the ECB

In early European trading, German inflation, as measured by the Harmonized Index of Consumer Prices (HICP), rose 8.2% year-on-year, in line with the estimate and previous release. Although fears of an interest rate hike have subsided, the odds of the European Central Bank (ECB) raising interest rates remain at 25 basis points, but the odds of 50 basis points have recently increased to 58. %, as shown by STIRs.

ECB vs. Fed interest rate spreads a headwind for EURUSD

In July, both banks, the ECB and the Federal Reserve, will hold their monetary policy meetings. Currently, the ECB deposit rate stands at minus 0.50%, while the US Federal Reserve’s Federal Funds Rate (FFR) is at 1.75%, reinforcing the appetite for the dollar. With the ECB expected to rise 25 basis points and the Fed moving at least 75 basis points, spreads would widen further to -0.25% (ECB) vs. 2.50% (Fed), which which means that the USD would maintain the advantage, opening the door to more selling pressure on the EURUSD.

EURUSD Price Technical Outlook

EURUSD continues to weigh, as the daily chart shows, with the daily moving averages (DMAs) sitting well above the exchange rate. However, with the pair’s price action overextending to the downside and the Relative Strength Index (RSI) in oversold conditions, it indicates that EUR/USD could rally briefly before launching another assault below. Parity.

Therefore, the first resistance of the EURUSD would be 1.0100. A break above will expose the 11 Jul high at 1.0183, followed by a test of the 1.0200 figure. On the other hand, the first support of the EURUSD would be the parity. A break of the latter would expose the December 2002 lows around 0.9859.