EUR/USD Rebounds as U.S. Treasury Yields Decline Ahead of PCE Data

Highlights

• Euro strengthens against the U.S. Dollar due to lower Treasury yields.
• Conflicting opinions among Fed officials about interest rates and inflation.
• Euro zone bond yields increase, affecting future ECB rate hike expectations.

Overview

The Euro is strengthening against the U.S. Dollar on Friday, recovering from its lowest level since March 21 in the previous session. This upward movement is likely a response to a decrease in U.S. Treasury yields.

As of 10:15 GMT, the EUR/USD pair is being traded at 1.0737, marking an increase of 0.0010 or 0.09%. On Thursday, the Invesco CurrencyShares Euro Trust closed at $99.00, down by $0.28 or 0.28%.

Traders Await Inflation Data Amid Fed Rate Speculations

Traders of EUR/USD were eagerly awaiting the release of the personal consumption expenditures price index for April, which serves as the Federal Reserve’s favored indicator of inflation. Recently, there has been conflicting information from Fed officials regarding the future of interest rates.

Some officials have expressed a preference for pausing the Fed’s interest rate hike campaign, as they believe that the full impact of higher rates on the economy has not yet been fully realized. Conversely, some officials argue that additional rate hikes may be necessary to curb inflation, while others have stated that their decisions will depend on forthcoming economic data.

Apart from the inflation index, reports on personal spending and income for April, as well as durable goods orders data, are also anticipated to be released on Friday.

Traders Watching Debt Ceiling Talks

EUR/USD traders are closely monitoring the negotiations on the debt ceiling deal as the June 1 deadline approaches, which could potentially lead to a default on U.S. debt obligations. Talks seemed to have made progress on Thursday, but there are still ongoing discussions on sensitive issues, as mentioned by Republican negotiator Rep. Patrick McHenry.

Euro Zone Bonds React to Data, Comments

In other news, Euro zone government bond yields increased on Friday due to positive economic data and hawkish comments by central bank officials, leading to a reassessment of future European Central Bank rate hikes.

Euro area bonds are catching up with U.S. Treasuries as U.S. 10-year yields rose, driven by strong jobless claims data indicating a robust labor market. Germany’s benchmark 10-year yield also rose.

Bond markets continue to adjust their expectations regarding future central bank actions. Concerns about the U.S. debt ceiling did not provide a clear market direction, and a repricing that occurred in March is being reversed as fears of a severe credit crunch diminish.

The pricing for the peak of the ECB depo rate dropped in early March but has since risen, indicating market expectations for an ECB deposit facility rate by year-end. Investors are now looking forward to next week’s euro inflation data for further insights.

Technical Analysis

The EUR/USD is trading on the weakside of 1.0834 (S1) on Tuesday, putting it in a bearish position. This level is new resistance.

If sellers continue to emerge and there is an acceleration to the downside then look for the move to possibly extend into 1.0657 (S2).

Overcoming and sustaining a rally over 1.0834 (S1) will signal the return of buyers. This could generate the upside momentum needed to retest the PIVOT at 1.0965 over the near-term.

For a look at all of today’s economic events, check out our economic calendar.