EUR/USD: Supported by ECB’s Hawkish Stance Despite Drop in German PPI

Highlights

• EUR/USD rises with ECB’s support for rate increases.
• Eurozone bond yields decline due to drop in German producer prices.
• China’s lending cuts and Powell’s testimony influence global markets.

Overview

EUR/USD climbed higher on Tuesday, supported by the European Central Bank’s (ECB) hawkish stance, as two policymakers advocated for further rate increases. ECB board member Isabel Schnabel emphasized the importance of a proactive approach, favoring doing “too much rather than too little.” Market participants now anticipate ECB rates to peak above 3.9%, up from the previous expectation of around 3.75% a month ago.

Eurozone Bond Yields Dip on German Producer Price Drop

Eurozone bond yields dipped in response to a larger-than-expected drop in German producer prices. Germany’s 2-year bond yield, which is sensitive to interest rate expectations, fell by 1.5 basis points (bps) to 3.19% after a previous 4 bps rise, reaching a three-month high. The benchmark 10-year bond yield for Germany declined by 3 bps to around 2.49%, following a 5 bps increase on the previous day. These developments indicate a cooling of eurozone inflation, although it remains well above the ECB’s 2% target, pointing to potential future rate hikes.

German PPI Drops, Surpassing Expectations

German producer prices in May registered a significant 1.4% decrease compared to April, surpassing economists’ expectations of a 0.7% decline. This figure added to the market momentum, suggesting a retracement. However, it is not considered the most critical indicator. Italy’s 10-year bond yield also fell by 5 bps to 4.08%, offsetting the previous day’s climb of 9 bps.

Focus Shifts to Powell Testimony

Market focus is expected to shift to the upcoming testimony from U.S. Federal Reserve Chair Jerome Powell to Congress, where his remarks on inflation outlook and interest rates could influence both U.S. and global markets.

Short-Term Outlook:  Underpinned by ECB’s Hawkish Tone

Overall, the EUR/USD gained momentum supported by the ECB’s hawkish stance, while eurozone bond yields experienced a decline. Market participants closely monitored economic indicators and speeches from ECB officials. Traders are also anticipating Jerome Powell’s testimony for further insights into the global financial landscape.

Technical Analysis

The current 4-hour price of 1.0924 is slightly lower than the previous 4-hour close of 1.0938, indicating a minor decline in price.

The current 4-hour price is above the 200-4H moving average of 1.0823, suggesting a bullish signal.

Similarly, the current 4-hour price is also higher than the 50-4H moving average of 1.0840, reinforcing the bullish sentiment.

The 14-4H RSI reading of 58.84 indicates a moderate level of strength in the market.

Considering the support and resistance areas, the current price of 1.0924 is within the minor support area of 1.0907 and below the major resistance area of 1.1006. This suggests a neutral to slightly bearish outlook.

The market sentiment for EUR/USD is slightly bearish. This is due to a small price decline and the proximity to a major resistance area. However, it’s crucial to keep an eye on price action and support/resistance levels for a more accurate assessment.