EUR/USD approaches 1.1000 as USD Index retreats ahead of Eurozone Inflation and ECB-Fed policy

• EUR/USD is marching towards 1.1000 after a recovery move as the USD Index has dropped after a short-lived recovery.
• Federal Reserve is widely anticipated to raise interest rates by 25bps to continue to maintain pressure on US CPI.  
• Investors are divides divided over the pace of interest rate hike that the European Central Bank will adopt.
• EUR/USD is auctioning in an Ascending Triangle chart pattern, which indicates a sheer contraction in volatility.

EUR/USD has resumed its upside journey towards the psychological resistance of 1.1000 in the early European session. The major currency pair is showing resilience after recovery as the US Dollar Index (DXY) has retreated from 102.10. The upside in the USD Index has remained capped around 102.20 for the past two weeks as investors are cautious amid uncertainty over the interest rate guidance by the Federal Reserve (Fed) to be delivered on Wednesday.

S&P500 futures have recovered their entire losses generated in the Asian session, indicating a strong recovery in the risk appetite of the market participants. Investors are capitalizing on easing United States banking jitters and solid quarterly performance from technology stocks. On Monday, JP Morgan Chase announced the acquisition of First Republic Bank‘s assets after regulators seized the collapsed lender.

Improved market sentiment has also supported the demand for US government bonds, which has trimmed the rally in US yields. The 10-year US Treasury yields have dropped below 3.56%.

Meanwhile, the Euro is expected to remain volatile ahead of the preliminary Eurozone inflation data. Tuesday’s Eurozone preliminary Harmonized Index of Consumer Prices (HICP) holds significant importance as it will be used by European Central Bank (ECB) policymakers while designing the monetary policy scheduled for Thursday.

Fed’s interest rate guidance- a key trigger ahead

To continue to maintain pressure on US Consumer Price Index (CPI), Federal Reserve chair Jerome Powell is widely anticipated to raise interest rates by 25 basis points (bps) consecutively to 5.00-5.25%. Headline inflation in the US economy is continuously declining being supported by lower gasoline prices, however, core inflation has been critically persistent due to resilient consumer spending.

While uncertainty over interest rate guidance is still stable as US economic conditions are changing now. For straight six months, US Manufacturing PMI is landing below the 50.0 threshold which is considered a situation of contraction US Gross Domestic Product (GDP) slowed down to 1.1% in the first quarter from the consensus of 2.0% due to lower inventories. Firms have significantly winded up their inventories due to a bleak economic outlook amid higher interest rates.

Apart from that, US labor market conditions are losing their resilience as firms are cutting jobs due to poor forward demand.

To avoid recession, the Federal Reserve might pause paddling interest rates as it would infuse some confidence in investors and producers. Morgan Stanley has announced a planned lay-off of 3K more jobs as deals have slumped as reported by Bloomberg.

Eurozone inflation to provide cues about ECB’s monetary policy action

After observing a weak pace in Eurozone Gross Domestic Product (GDP) data, which landed at 0.1% vs. the consensus of 0.2%, investors are shifting their focus toward inflation data. As per the consensus, the preliminary headline Harmonized Index of Consumer Prices (HICP) (April) is seen unchanged at 6.9% and 0.9% on a quarterly and monthly basis. Also, annual core HICP is seen steady at 5.9% while monthly core HICP could land lower at 1.1% from the former release of 1.3%.

Eurozone inflation is seen almost unchanged due to the extreme labor shortage, which has shifted the bargaining power for wages to job seekers from hiring agencies.

There is no denying the fact that European Central Bank President Christine Lagarde will hike interest rates to improve its defense against stubborn inflation. The street is divided over the pace of the interest rate hike that the central bank will adopt. In March, the European Central Bank raised interest rates by 50 basis points (bps).

EUR/USD technical outlook

EUR/USD is auctioning in an Ascending Triangle chart pattern on an hourly scale, which indicates a sheer contraction in volatility. The upward-sloping strandline of the triangle pattern is plotted from April 17 low at 1.0909 while the horizontal resistance is placed from April 14 high at 1.1075.

A stick price action with the 20-period Exponential Moving Average (EMA) at 1.0940 indicates a rangebound performance.

Also, the Relative Strength Index (RSI) (14) is oscillating in the 40.00-60.00 range, signaling the need for a potential trigger for a decisive action.