EUR/USD climbs as key US inflation gauge ticks lower

• US Core PCE Price Index ticks lower
• Eurozone headline CPI eases but core CPI rises
• German headline and core inflation accelerate

EUR/USD is trading at 1.0898 in the North American session, up 0.32%.

Eurozone inflation falls but core rate rises

Inflation in the eurozone continues to fall. Eurozone CPI is expected to fall to 5.5% in June, down from 6.1% in May and a notch below the consensus of 5.6%. Headline inflation has fallen to its lowest level since January 2022.

The problem for the ECB is that Core CPI, which is a more reliable gauge of inflation trends, moved the wrong way. Core CPI ticked higher to 5.4%, up from 5.3% and below the consensus of 5.5%. These levels of core inflation are incompatible with a 2% inflation target and today’s inflation report won’t prevent the ECB from delivering a rate hike in July. The ECB may be forced to increase rates beyond the July meeting until there is evidence that core inflation has turned the corner and shows clear signs of deceleration in the second half of the year.

Germany’s inflation report was worse, as both headline and core inflation moved higher, as expected. Headline inflation rose to 6.4% in June, up from 6.1% in May, while the core rate climbed from 5.4% to 5.8%. Inflation had fallen over six straight months and the June numbers could be an anomaly, but as ECB President Lagarde stated earlier this week, the battle against inflation isn’t over yet.

US Core PCE Price Index, the Fed’s favourite inflation gauge, eased lower in May and the euro has gained ground. The index dipped to 4.6% y/y, down from 4.7% in April, which was also the consensus. On a monthly basis, the index fell to 0.1%, down from 0.4%. The decline in inflation hasn’t had much effect on market rate pricing, with an 86% probability of a 25-bp rate hike, according to the CME FedWatch tool.

The week wraps up with UoM Consumer Sentiment, which is expected to rise to 63.9 in June, up from 59.2 in May.

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EUR/USD Technical

• EUR/USD continues to put pressure on resistance at 1.0916. This is followed by resistance at 1.0988
• 1.0822 and 1.0750 are providing support

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