Daily digest market movers: EUR/USD rises as US Dollar slumps
- EUR/USD advances to 1.0830 as the market sentiment remains bullish on firm Fed rate-cut prospects for September. S&P 500 futures remain flat in the European session but hold gains near all-time highs. However, the sentiment could be volatile ahead after the release of the US consumer inflation data.
- Annual headline CPI is forecasted to have softened to 3.4% from 3.5% in March. In the same period, the core inflation, which strips off volatile food and energy prices, is anticipated to decelerate to 3.6% from the prior reading of 3.8%. Economists expect that monthly headline CPI to grow at a steady pace of 0.4% while core CPI has grown at a slower pace of 0.3% from the prior reading of 0.4%.
- The US inflation reports for the last three months have remained hotter than expected. Due to this, investors postponed expectations for the Fed to begin reducing rates in September from March, which was anticipated at the beginning of the year. The Fed could not start lowering interest rates until it gets confidence that inflation will sustainably return to the 2%.
- To get confidence that inflation is on track to return to 2%, price pressures must decline consistently for at least three months. Inflationary pressures remaining stubborn would force traders to pare rate-cut bets for September, while a soft inflation report will do the contrary.
- Meanwhile, the Euro remains upbeat as investors hope that higher interest rates for longer by the Fed will slow down the pace at which the European Central Bank (ECB) was anticipated to return to policy normalization.
- On Tuesday, ECB policymaker and Banque Nationale de Belgique Governor Pierre Wunsch commented that the first two 25 basis points (bps) reductions in key ECB rates are close to a "no-brainer" but added that high rates for longer by the US Federal Reserve could lead to a slower pace of rate cuts.
- Historically, investors underpin the US Dollar against the Euro if the policy divergence between the Fed and the ECB widens. A weak Euro brings significant business to Eurozone merchants from overseas markets. This could strengthen the economic outlook and result in higher employment and wage growth, which eventually will flare up price pressures again.
- On the economic data front, Eurostat has released a second estimate of preliminary Q1 Gross Domestic Product (GDP) data. The GDP report indicated that quarterly and annualized GDP growth were in line with the consensus and the preliminary reading at 0.3% and 0.4%, respectively. While EUR/USD didn't react to the second estimate as investors' focus remains on the US CPI data.
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