The May CPI report overshot market expectations. The greenback initially appreciated on the back of rising 10-year UST yields, but quickly saw all gains wiped out. Investors were unfazed by the hot inflation print, since Fed Chair Powell has repeatedly made it clear that he does not intend to wind down stimulus even if inflation heats up.
The Governing Council sees the Eurozone economy expanding by 4.6% this year, 4.7% in 2022, and 2.1% in 2023 (in March, the GDP forecast stood at 4%, 4, 1% and 2.1%, respectively). The inflation forecast in the region was raised from 1.5% to 1.9% for 2021, from 1.2% to 1.5% for 2022, and was left unchanged at 1.4% for 2023.
In the upshot, the dollar retreated across the board. Upside in EURUSD was capped by gains in the EURGBP pair. Market participants likely shifted their focus to sterling on the heels of a Reuters report according to which the UK struck a deal on fisheries with the EU. The parties agreed on a catch limit for the British fleet worth approximately GBP 333 mln.
Today’s macro agenda (GMT 3)
- 11:30 UK: BoE Governor Andrew Bailey speech
- 15:30 Canada: capacity utilization (Q1)
- 17:00 US: Reuters/Michigan consumer sentiment (June)
- 20:00 US: Baker Hughes weekly O&G rig count
Current outlook
At the time of writing, the euro was trading at 1.2178, with all major currencies showing green on the screen. The FX leaderboard is currently topped by AUDUSD ( 0.26%), EURUSD ( 0.09%) and NZDUSD ( 0.14%).
Following the release of the US consumer price report, the 10-year yield jumped to 1.533%. Given that investors brushed aside the CPI print, sticking to earlier statements by Fed officials, the yield dropped to 1.434% by the close.
Today’s economic calendar is a blank slate. The US10Y yield remains the key factor driving major pairs. The daily yield pattern flashes the possibility of a decline to 1.35%. If the decline in UST yields picks up, the euro bulls will push for the 1.2300 handle (key resistance level for June). In the absence of surprises, the price action will reach that target level by June 23. All the bulls need to do it break out of 1.2220 as demand for the single currency will rise amid technical signals (breach of the June top, pullback from the trend line). Heading into the weekend, we see EURUSD climbing to 1.2205.