Euro drifts higher with eye on German Economic Sentiment, US Inflation

• There are no tier-1 events in the eurozone or the US today
• German ZEW Economic Sentiment expected to decline further on Tuesday
• US releases CPI on Tuesday, Fed rate decision on Wednesday

The euro is showing little movement on Monday trading at 1.0755, up 0.05% on the day.

German confidence expected to drop

Germany releases ZEW Economic Sentiment on Tuesday and the index is expected to decline to -13.1 in June, down from -10.7  in May. The index fell into negative territory for the first time since December 2022, and the consensus is that the outlook for the German economy has only worsened. Similarly, Eurozone ZEW Economic Sentiment is expected to fall from -9.5 to -11.9 points.

In its May report for German confidence, the ZEW noted that much of the pessimism centered on expectations of further ECB rate hikes and that probably hasn’t changed, with the ECB set to deliver a rate hike on Thursday. Eurozone inflation dropped in May to its lowest level in a year at 6.1%, but the ECB remains hawkish and wants to see inflation, particularly Core CPI, fall more quickly.

The US releases a highly-anticipated inflation report on Tuesday, just one day before the Fed announces its rate decision. Inflation has been falling and that trend should continue. Headline inflation is expected to fall from 4.9% to 4.1%, and the core rate is projected to ease from 5.5% to 5.3%. Market rate pricing is swinging, with the probability of a pause rising from 70% on Friday to 77% today, according to the CME’s FedWatch. A rate hike remains unlikely, barring a sharp spike in inflation.

If the Fed stays on the sidelines, the markets will be looking for clues as to what happens next. The Fed may decide to skip raising rates on Wednesday but leave the door wide open for further rate hikes, as early as in July. There seems to be some support amongst Fed members for more tightening, and a pause tomorrow may turn out to be a short skip ahead of more rate increases.

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EUR/USD Technical

• EUR/USD tested support at 1.0734 earlier. Below, there is support at 1.0682
• 1.0802 and 1.0854 are resistance lines

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