EUR/USD advances to 1.0800 as US Dollar slumps ahead of US data-packed week

EUR/USD moves higher to 1.0800 as the appeal for risky assets improves.
The ECB is expected to start reducing interest rates in June.
Investors keenly await the US inflation data for fresh guidance on the Fed’s interest rates.

EUR/USD rises to 1.0800 in Monday’s American session due to improved market sentiment. The major currency pair holds gains as traders have priced in that interest rate cuts from the European Central Bank (ECB) will be more and start earlier than the Federal Reserve (Fed). Financial markets have anticipated that the ECB will reduce interest rates by 70 basis points (bps) this year and will start lowering them from the June meeting.

On the contrary, the Fed is expected to begin reducing interest rates from September and investors expect the Fed to bring down borrowing rates by 45 bps by the year-end.

This week, the Euro will be guided by Eurozone Q1 preliminary Gross Domestic Product (GDP) data, which will be published on Wednesday. The Eurostat is expected to report that the economy has grown steadily by 0.3% and 0.4% on a quarterly and an annual basis, respectively. The GDP data will provide fresh cues about the Eurozone’s economic outlook. EUR/USD will also be guided by the US Consumer Price Index (CPI) data for April, which is also set to be released on Wednesday.

Daily digest market movers: EUR/USD jumps ahead of crucial Eurozone, US economic data

EUR/USD jumps to near 1.0800 as the market sentiment is upbeat. The S&P 500 registers decent gains at open as investors shrugged off uncertainty ahead of the United States Consumer Price Index (CPI) data for April, which will be published on Wednesday.
Economists have forecasted that annual headline inflation declined to 3.4% in April from 3.5% in March. The annual core CPI, which excludes volatile food and energy prices, is estimated to have decelerated to 3.6% from the prior reading of 3.8%. Monthly headline and core inflation are expected to have slowed to 0.3%, compared to the former reading of 0.4%.
US consumer inflation data will significantly influence market expectations for Federal Reserve rate cuts, which investors are currently anticipating from the September meeting. The CME FedEWatch tool shows that there is a 61% chance that interest rates will come down from their current range of 5.25%-5.50%.
Before the US CPI data, investors will focus on the US Producer Price Index (PPI) data for April, which will be published on Tuesday. The producer inflation data will indicate whether business owners hiked or reduced prices of goods and services at the premises.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, fell sharply to 105.30 in Monday’s American session. Last week, the US Dollar came under pressure after a significant rise in Initial Jobless Claims for the week ending May 3 that dampened investors’ confidence in US labor market strength.

Technical Analysis: EUR/USD plays with 200-DEMA

EUR/USD recovers Friday’s losses and rises to 1.0800, close to the 200-day Exponential Moving Average (EMA), which trades around 1.0780. The shared currency pair is steadily approaching the downward-sloping border of the Symmetrical Triangle pattern formed on a daily timeframe, which is plotted from December 28 high around 1.1140. The upward-sloping border of the triangle pattern is marked from the October 3 low at 1.0448. The Symmetrical Triangle formation exhibits a sharp volatility contraction.

The 14-period Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, suggesting indecisiveness among market participants.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

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