Title: US Dollar Outlook: EUR/USD Holds Ground Above Monthly Lows Ahead of Key US CPI Data
Original Author: Diego Colman, Forex.com
Rewritten and Expanded by ChatGPT
As the foreign exchange market anticipates key inflation data from the United States, the US dollar remains under the spotlight. The greenback has been trading with mixed momentum early in the week as traders navigate a landscape involving varying central bank policy paths, expectations around inflation, and speculative interest in future rate adjustments. A critical factor in the near term will be the upcoming Consumer Price Index (CPI) data, which will be instrumental in shaping sentiment on the US dollar and currency pairs such as the EUR/USD.
This article provides a detailed analysis of the current state of the US dollar with a targeted focus on the EUR/USD pair, upcoming economic data, and the broader macroeconomic environment influencing forex markets.
EUR/USD Holds Steady Despite Dollar Strength
Despite increased strength from the US dollar in recent sessions, the EUR/USD currency pair has managed to maintain levels above the monthly low established earlier. This resilience can largely be attributed to cautious positioning by investors ahead of this week’s key US inflation release, the Consumer Price Index data for May.
– EUR/USD recovered slightly during trading sessions at the start of the week, gaining support near the 1.0725 level.
– Dollar gains have been sustained by relatively hawkish Federal Reserve remarks in recent weeks, creating downward pressure on the pair.
– However, the absence of significant macroeconomic data early in the week has contributed to a consolidation phase in the currency pair.
The stability in the EUR/USD pair ahead of critical inflation data suggests that market participants are unwilling to commit to any aggressive directional bets without clearer signals on Federal Reserve policy.
Why the US CPI Report Matters
The Consumer Price Index (CPI) data set to be released in the United States this week is one of the most influential metrics for markets trying to anticipate the next moves by the Federal Reserve. The Federal Open Market Committee has repeatedly emphasized its data-dependent approach, especially in the context of deciding when to begin lowering interest rates.
The inflation data will be released on Wednesday and will include both the headline CPI and the core CPI (excluding food and energy components). The year-over-year headline CPI is expected to remain steady at 3.4 percent, with the core CPI likely to ease slightly from 3.6 percent to 3.5 percent. These figures are well above the Fed’s 2 percent inflation target.
– A higher-than-expected headline or core CPI could:
– Undermine expectations of Federal Reserve rate cuts in 2024
– Push Treasury yields higher
– Support further dollar appreciation
– Apply downward pressure on EUR/USD and other USD pairs
Alternatively:
– A lower-than-expected CPI print could:
– Revive expectations for a rate cut later this year
– Lead to softer Treasury yields
– Encourage dollar selling
– Push EUR/USD back toward resistance zones around 1.08 and beyond
Thus, the CPI report is likely to serve as a turning point that determines whether the US dollar resumes its recent upward trend or begins to pull back due to shifts in rate cut expectations.
Federal Reserve Meeting and Dot Plot Projections
Alongside the inflation data, investors are also gearing up for Wednesday’s FOMC policy decision. While the market has priced in a very high probability (near certainty) that the central bank will hold rates steady at 5.25 percent to 5.50 percent, expectations are heavily focused on any forward-looking statements.
Of particular importance will be the updated Summary of Economic Projections (SEP), widely known as the dot plot, which outlines individual committee members’ expectations for the future path of rates.
– The March dot plot suggested three rate cuts in 2024
– Any revision suggesting fewer cuts may boost the dollar and hurt EUR/USD
– Conversely, retaining or increasing projected cuts could lead to
Read more on EUR/USD trading.