EUR/USD rises to 2-week high as US inflation falls

• US inflation falls to 4.0%
• Fed widely expected to pause rates on Wednesday
• ECB projected to raise rate on Thursday

EUR/USD is in positive territory on Tuesday, trading at 1.0803, up 0.42% on the day.

US inflation falls to 4.0%

The US dollar is down on Tuesday as US inflation eased in May. CPI dropped from 4.9% to 4.0%, just below the consensus of 4.1%, its lowest level since March 2021. On a monthly level, CPI eased to 0.1%, down from 0.4% and below the consensus of 0.2%.

The core rate eased from 5.5% to 5.3% as expected, a modest drop. On a monthly basis, core CPI rose 0.4% for a third straight month, matching the consensus. This is incompatible with a 2% inflation target and provides support for policymakers who want to leave the door open to further rate hikes.

Market pricing has been very volatile over the past few weeks and moved sharply again on Tuesday. Prior to the inflation report, the markets had priced in a pause at 75%; this jumped to 99% after the inflation data before dipping to 91%, according to CME’s FedWatch.

The ECB will meet on Thursday, with the markets expecting a 25-basis point hike, which would bring the deposit rate to 3.50%. In May, inflation in the eurozone fell to its lowest level in a year, but ECB President Lagarde has kept a hawkish stance. Lagarde has stressed that the number one priority is wresting inflation back to the 2% target and has signalled that more rate hikes are necessary to achieve that goal. Core inflation remains stubbornly high, which could mean more tightening in July.

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EUR/USD Technical

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

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