EUR/USD: Rising Treasury Yields Pressure Euro, But Core Inflation Keeps ECB Active

Highlights

• Core Eurozone inflation remains high
• US dollar strengthens as Treasury yields climb
• ECB policymakers concerned about inflation, planning for more rate hikes

Overview

The Euro is down on Wednesday but off its lows after a report out of the Euro Zone showed Core Euro Zone inflation was still climbing. The news suggested policymakers at the European Central Bank (ECB) would remain active in raising rates to combat stubborn inflation.

At 14:00 GMT, the EUR/USD is trading 1.0957, down 0.0017 or -0.16%.

Dollar Strengthens on Rising Treasury Yields, Diverging Fed Opinions

Meanwhile, in the United States, the dollar strengthened as U.S. Treasury yields continued to climb with 2-year Treasury yields, which are extremely sensitive to Fed expectations, gaining nearly 9 basis points (bps) to a one-month high of 4.2692%.

In other news, in an interview with Reuters, St. Louis Fed chief James Bullard expressed a preference for an additional 75 basis points of tightening, as opposed to the market’s expectation of one more 25 basis points hike next month and the possibility of two quarter-point cuts later in the year.

Meanwhile, Atlanta Fed President Raphael Bostic, in an interview with CNBC, predicted only one more quarter-point hike followed by an extended pause. This uncertainty that was somewhat hawkish, provided additional support for U.S. Dollar over the Euro.

Euro Zone Headline Inflation Drops, But Core Readings Cause Concern at ECB

Euro zone headline inflation has decreased from 8.5% to 6.9%, but the underlying readings have remained high, causing concern at the ECB about the persistence of price pressures. ECB policymakers are worried that high energy costs are seeping into the broader economy, making inflation more difficult to tame.

Excluding unprocessed food and fuel, prices have accelerated to 7.5%, and an even narrower inflation measure that also strips out alcohol and tobacco has picked up to 5.7%. The persistently high core readings mean that most ECB policymakers have already stated that interest rates will need to continue rising.

ECB Concerned Over Services Inflation Signaling Potential Wage Problem

The ECB’s main worry is that services inflation, now at 5.1%, could be signaling that wages are becoming a key problem. Another issue is that food inflation is accelerating, which could change spending behavior and pressure wage demands.

The ECB may not stop at its May rate hike. Traders predict 85 basis points of hikes until the 3% deposit rate reaches its peak. The ECB believes that the price growth will continue for a few more months before it plateaus. A significant decline may not happen before the fall.

Technical Analysis

From a daily technical viewpoint, the EUR/USD is trading above the pivot at 1.0954. However, neutral after a four-day setback from recent highs.  Overtaking 1.0954 will be a sign of strength that could extend the rally into 1.1076.  Meanwhile, a break under 1.0925 will indicate the presence of sellers. This could create the downside momentum needed to challenge support at 1.0832.

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