Euro rebounds on PMIs

The euro has posted gains and pushed above the 1.07 line on Thursday. In the North American session, EUR/USD is trading at 1.0702, up 0.48% on the day.

Eurozone grapples with high inflation, low growth

German and European Manufacturing PMIs were within expectations, pointing to continued expansion. This has boosted the euro, which had lost over 1% over the two previous days. Still, risk remains tilted to the downside for the euro, as soft GDP and high inflation numbers have clouded the outlook for the bloc. Quarterly GDP releases for Q1 have been weak, with Germany at 0.2%, France at -0.2% and Italy at 0.1%. These numbers point to sluggish economic growth, at a time when inflation continues to accelerate, to the point that the dovish ECB has hastily announced that it will raise embark on a rate-hike cycle, starting in July.

On the inflation front, eurozone rose to 8.1% in May, setting a new record high for a seventh straight month. This was higher than the April record high of 7.4% and above the forecast of 7.8%. The reading comes on the heels of Germany’s May CPI, which surged to 8.7%. This was sharply higher from 7.8% in April and above the forecast of 8.0%. France and Spain also reported an acceleration in inflation. High inflation and weak growth are the recipe for stagflation, a scenario which is no doubt keeping ECB policymakers up at night.

The ‘usual suspects’ driving inflation are at play, with the war in Ukraine and upward pressures on energy and food prices showing no signs of easing anytime soon. As inflation is broad-based, there are forecasts that inflation will continue to accelerate. The EU’s plan to block 90% of Russian oil imports has sent oil prices even higher, which will exacerbate inflationary pressures in the eurozone.

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EUR/USD Technical

• EUR/USD is testing resistance at 1.0686. Above, there is major resistance at 1.0813
• There is support at 1.0608 and 1.0481

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