EUR/USD comes under pressure after expected decline in Eurozone inflation

• EUR/USD corrects to near 1.0720 as the US Dollar recovers despite weak US Manufacturing PMI data.
• Eurozone HICP softened expectedly in June, prompting ECB’s rate-cut prospects.
• Investors await Fed Powell’s speech for fresh guidance on interest rates.

EUR/USD remains on the backfoot slightly above 1.0700 in Tuesday’s European session. The major currency pair comes under pressure due to expected decline in the preliminary Eurozone Harmonized Index of Consumer Prices (HICP) data for June. Annual HICP decelerated to 2.5% expectedly year-on-year from May’s reading of 2.6%. In the same period, the core HICP, which excludes volatile components like food, energy, alcohol, and tobacco, grew at a slower pace of 2.8%, as expected, from the prior release of 2.9%. The scenario in which price pressures in the Eurozone economy decline, at an expected or at a higher pace, bodes poorly for the Euro as it will boost expectations of the European Central Bank’s (ECB) subsequent interest rate cuts.

On Monday, the preliminary German HICP report for June showed that price pressures softened more than expected, opening the door for the ECB to make back-to-back rate cuts. However, policymakers have refrained from providing a specific rate-cut path as they worry that an aggressive policy-easing campaign could revamp price pressures again.

Also, ECB President Christine Lagarde said at the ECB Forum on Central Banking on Monday, “It will take time for us to gather sufficient data to be certain that the risks of above-target inflation have passed.” Lagarde added, “The strong labor market means that we can take time to gather new information,” Reuters reported.

Meanwhile, uncertainty ahead of France’s second-round runoffs scheduled on July 7 will also keep the Euro on its toes. As per the exit polls for the first round of France’s parliamentary elections, Marine Le Pen’s far-right National Rally (RN) is in a comfortable position but with a smaller margin than projected. 

Daily digest market movers: EUR/USD falls while US Dollar recovers further

• EUR/USD falls as the US Dollar (USD) rebounds despite the United States (US) ISM Manufacturing Purchasing Managers’ Index (PMI) report for June showing that factory activities unexpectedly declined. Data also indicate that inflationary pressures in the manufacturing sector, measured by the ISM Manufacturing Prices Paid Index,  grew at a significantly slower pace than expected.
• The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, recovers sharply to near 106.00. Meanwhile, investors look for more cues about when the Federal Reserve (Fed) will start reducing interest rates this year. For that, investors will focus on Fed Chair Jerome Powell’s speech, scheduled at 13:30 GMT.
• Currently, financial markets expect the Fed to start reducing interest rates from the September meeting. Two rate cuts this year, against only one cut projected by Fed policymakers in their latest dot plot, are expected.
• Apart from Fed Powell’s speech, investors will also focus on the JOLTS Job Openings data for May, which will be published at 14:00 GMT. Economists expect that employers posted 7.9 million job vacancies, slightly lower than April’s reading of 8.06 million.

Technical Analysis: EUR/USD remains below 200-day EMA

EUR/USD drops to near 1.0720 after failing to hold above the 20-day Exponential Moving Average (EMA), which trades around 1.0740. The major currency pair rebounded last week after discovering strong buying interest near the upward-sloping border of the Symmetrical Triangle formation on a daily timeframe near 1.0666, which is marked from 3 October 2023 low at 1.0448. The downward-sloping border of the above-mentioned chart pattern is plotted from 18 July 2023 high at 1.1276. The Symmetrical Triangle formation exhibits a sharp volatility contraction, which indicates low volume and narrow ticks.

The major currency pair remains below the 200-day Exponential Moving Average (EMA) near 1.0790, suggesting that the overall trend is bearish.

The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, suggesting indecisiveness among market participants.