EUR/USD Hits 1.0850 as US PCE and Eurozone HICP Diverge

Quick Look:

• EUR/USD Movement: The pair rose to 1.0850 due to US PCE cooling and robust Eurozone HICP data.
• US Inflation Data: April PCE showed a 0.3% monthly increase; Core PCE at its lowest since March 2021.
• Eurozone Inflation: Surprising HICP data suggests ECB may delay aggressive rate cuts.

The EUR/USD pair has continued its upward trajectory, reaching around 1.0850 during Mondayâ€s early Asian session. Recent US Personal Consumption Expenditures (PCE) inflation data has largely influenced this movement, which showed a cooling trend. Additionally, the unexpectedly robust Eurozone Harmonised Index of Consumer Prices (HICP) inflation data also played a role. As the market anticipates key economic indicators, including the US ISM Manufacturing PMI and the European Central Bank (ECB) interest rate decision, the EUR/USD pair is poised for significant volatility.

US PCE Inflation Data Reflects Cooling Trend

On Friday, the US Commerce Departmentâ€s Bureau of Economic Analysis released the PCE Price Index figures for April, showing a 0.3% monthly increase, aligning with expectations. Annually, the PCE index maintained a steady rise of 2.7%, mirroring Marchâ€s data. More notably, the Core PCE Price Index, which excludes volatile food and energy prices, increased by 2.8% year-over-year, also in line with market consensus. This was the lowest level of core inflation since March 2021.

Despite the cooling inflation data, it was insufficient to prompt expectations for a rate cut by the Federal Reserve.

Eurozone HICP Inflation Data Surpasses Expectations

In contrast to the US, the Eurozone delivered a surprisingly strong HICP inflation report, which has bolstered the Euro. As previously anticipated, the hotter-than-expected inflation figures suggest that the ECB might not immediately proceed with aggressive rate cuts. Financial markets had already priced in a 25 basis point (bps) rate cut by the ECB in June and a cumulative 57 bps reduction through 2024. However, the robust inflation data might cause the ECB to reassess its policy trajectory.

ECB President Christine Lagardeâ€s upcoming press conference will be scrutinised for any indications of a change in the pace of rate cuts. A dovish tone from Lagarde could exert downward pressure on the Euro, potentially creating headwinds for the EUR/USD pair. Conversely, any hints of a more hawkish stance could further support the Euroâ€s strength against the Dollar.

Anticipation Builds for US ISM Manufacturing PMI and ECB Decision

As the market looks ahead to the US ISM Manufacturing PMI data for May, there is considerable speculation about its potential impact on the USD. A stronger-than-expected PMI could bolster the Dollar by reinforcing the narrative of a resilient US economy. A weaker report might amplify concerns about an economic slowdown, further influencing Fed policy expectations.

Simultaneously, the ECBâ€s interest rate decision on Wednesday will be pivotal. The combination of the recent inflation data and the ECBâ€s forward guidance will provide crucial insights into the central bankâ€s policy outlook. Traders will be particularly attentive to Lagardeâ€s remarks, seeking clues on future monetary policy moves.

The interplay between the cooling US inflation data and the stronger-than-expected Eurozone inflation figures has set the stage for significant movements in the EUR/USD pair.

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