U.S. Inflation Slows; Traders Eye Rate Cut Clues

EUR/USD Bulls Test Resistance; RSI Nears Overbought

U.S. inflation took a small step in the right direction last week, as indicated by the CPI numbers that came in below the previous reading but in line with expectations. The Core CPI showed a 0.3% change, down from 0.4% the previous month. The headline figure showed the same dynamic and the yearly headline CPI dropped to 3.4% from the previous 3.5%.

The fact that inflation grew less than expected is definitely not enough to sway the Fed into a rushed rate cut but it led markets to price in at least two cuts for this year. At the time of writing, CME’s FedWatch tool shows a 90.9% probability that the rate stays unchanged at the June meeting and just a 26% probability of a cut in July. On the other hand, the European Central Bank (ECB) made it clear that a cut is in the works and that it could come as soon as July.

This week we will get more clues about the rate path, including the FOMC Meeting Minutes due Wednesday but the biggest spotlight will shine on the Personal Consumption Expenditures index (PCE) that is due next week, May 31.

Economic Calendar Highlights

Monday, French and German banks will be closed in observance of Whit Monday and the US Dollar will be affected by a few speeches delivered by FOMC voting members. The most important will be the speech of Federal Reserve Governor Christopher Waller, scheduled at 1:00 pm GMT.

Tuesday at 8:00 am GMT, ECB President Christine Lagarde will deliver a speech, followed at 1:00 pm GMT by another speech from Christopher Waller.

Wednesday at 6:00 pm GMT we will take a look at the Minutes of the latest FOMC Meeting. The document provides insights into the reasons that determined the latest rate vote, but what traders are actually looking for are clues about the next rate cut.

Thursday is PMI day, with a bunch of these indicators (Services and Manufacturing PMIs) coming out early in the morning for the European and U.K. economies. Later in the day, at 1:45 pm GMT, the same indicators but for the U.S. economy will come out; the impact is not huge but it can be notable if the actual readings differ a lot from expectations.

The last event of the week will be the release of the Revised UoM Consumer Sentiment survey, scheduled for Friday at 2:00 pm GMT.

Technical Outlook – EUR/USD

The pair is currently trading at 1.0880 after breaking the confluence zone between 1.0775 and 1.0810 with quite a lot of conviction. That resistance zone was formed of three elements, each with a lot of weight: the horizontal line at 1.0775, the 50-day Moving average, and a long-term bearish trend line.

The RSI is approaching overbought and the pair is facing another resistance, this time at 1.0890 – 1.0900. It’s very possible to see a pullback but the overall bias is bullish and with nothing major on the economic calendar, the price is likely to continue on its current path. Surely, any hints about the U.S. rate being cut sooner than expected will send shockwaves through the USD charts.