EUR/USD: Weakens as Traders Lower Fed Rate Cut Expectations

EUR/USD Highlights

• Euro trades at six-week low against the dollar
• Dollar strengthens due to safe-haven demand amid U.S. debt default risks
• Traders reduce bets on Fed rate cuts after solid U.S. consumer spending data

EUR/USD Overview

The Euro is trading at a six-week low against the dollar on Wednesday. The dollar strengthened against the single-currency, benefiting from its status as a safe-haven amid the risk of a U.S. debt default and as traders trimmed bets on imminent Federal Reserve rate cuts following solid consumer spending data in the United States.

At 11:23 GMT, the EUR/USD is trading 1.0835, down 0.0026 or -0.24%. On Tuesday, the Invesco CurrencyShares Euro Trust ETF (FXE) settled at $100.27, down $0.08 or -0.08%.

Euro Zone Inflation Rises; Traders Unmoved

Traders showed little response to the news that Euro zone inflation accelerated last month, Eurostat said on Wednesday, confirming preliminary data pointing to increasingly stubborn price growth among the 20 nations sharing the euro.

Overall price growth accelerated to 7.0% in April from 6.9% a month earlier, as rising services and energy costs offset a slowdown in food price growth.

Although underlying price growth, the key focus of European Central Bank policymakers in recent months, slowed a touch, the crucial services component continued to accelerate, pointing to mounting wage pressures that could get inflation stuck above the ECB’s 2% target.

Core Inflation Eases, but Challenges Remain

Excluding volatile food and fuel prices, core inflation slowed to 7.3% from 7.5%, while an even narrower measure, which excludes alcohol and tobacco, slowed to 5.6% from 5.7% in its first decline since last June.

Inflation has been above the ECB’s 2% target for nearly two years, and the bank has lifted interest rates by a combined 375 basis points since last July to arrest runaway price growth.

But more hikes are likely as it could be 2025 before inflation is back at target, and the “last mile” of disinflation, getting from 3% to 2%, could be especially difficult, taking nearly 2 years.

Technical Analysis

The EUR/USD is trading on the weakside of 1.0834 (S1) on Wednesday, putting it in a bearish position. If the selling pressure continues to increase and there is an acceleration to the downside then 1.0657 (S2) will appear on the radar as the next major target.

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.