Euro gains ground in thin holiday trade

The euro is coming off an excellent week, with gains of 2.15%. EUR/USD is trading in positive territory on Monday and is poised to record its first winning month.

German inflation rises

For those hoping for an inflation peak in the eurozone, it appears that the wait will continue. German headline CPI climbed to 7.9% YoY in May, up from 7.4% in April. On a monthly basis, the 0.9% gain is indicative of just how fast inflation is galloping along. The ‘usual suspects’ in surging inflation are at play, with the war in Ukraine and upward pressures on energy and food prices showing no signs of easing anytime soon.  Inflationary pressures are broadly based and there are forecasts that Germany’s inflation rate could top 10%.

Flash eurozone CPI for April will be released on Tuesday, and the consensus stands at 7.7% YoY, following a 7.4% gain in March. If inflation rose in April, the ECB will be under pressure to deliver a 50-bps rate increase. ECB Chief Economist Philip Lane spoke earlier today and took the unusual step of committing to 25-bps rate hikes in July and September. If eurozone CPI provides an upside surprise, the ECB will be under pressure to be more aggressive and raise rates by 50-bps.

In the US, solid consumer data on Friday has boosted risk sentiment and pushed the US dollar lower. Personal Spending rose 0.9% in April, above the forecast of 0.7%. The Core Personal Consumption Expenditures for April was unchanged with a gain of 4.9%. These readings indicate that US consumer spending remains steady despite high inflation.

The Core PCE Price Index, the Fed’s favorite inflation indicator slowed to 4.9% in April, down from 5.2% (4.9% exp.). This marked the index’s first decline in 17 months. Although I hesitate to read too much into one decline, other inflation indicators also have dropped – April CPI and core CPI were both lower than in March, for example. It’s too early to tell if we have hit that long-sought-after inflation peak in the US, but the markets have nonetheless lowered their expectations of Fed hikes, which has weakened the US dollar.

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EUR/USD Technical

• There is resistance at 1.0736 and 1.0865
• EUR/USD is testing support at 1.0648. The next support line is at 1.0519

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