The EUR/USD pair remains cautious around 1.0910 after reaching a weekly high of 1.0925 early on Friday. This reflects the market’s wary sentiment ahead of critical inflation data from both the Eurozone and the US. The recent sluggishness in Treasury bond yields may also contribute to the pair’s pullback.

Disappointing German inflation figures contrast with policymakers’ hawkish stance, putting pressure on the EUR/USD pair despite easing expectations for a Fed rate hike during the Federal Open Market Committee (FOMC) Monetary policy meeting in May.

Preliminary data for Germany’s Harmonised Index of Consumer Prices (HICP) indicates a slowdown in price pressures to 7.8% YoY in March, compared to 9.3% previously and a 7.5% market forecast. Similarly, German inflation based on the Consumer Price Index (CPI) eased to 7.4% YoY during the same month, down from 8.7% and a 7.3% expectation. Additionally, the Eurozone Business Climate gauge for March dipped to 0.70, while the Consumer Confidence figure came in at -19.2, both in line with market forecasts and previous figures.

Despite this, the European Central Bank (ECB) warned in its latest Economic Bulletin that inflation is expected to remain “too high for too long.” Frank Elderson, a member of the ECB Executive Board and Vice-Chair of the ECB’s Supervisory Board, also emphasized the need to reduce high inflation rates in a media interview.

In the US, final Q4 2022 GDP readings showed an annualized growth rate of 2.6%, slightly below the previous 2.7% forecast. Notably, Q4 Personal Consumption Expenditure (PCE) Prices matched 3.7% QoQ forecasts and prior figures, while the Core PCE figure increased to 4.4% QoQ compared to the 4.3% estimate and previous data. Furthermore, Weekly Initial Jobless Claims rose to 198K for the week ending March 25, slightly above the 191K prior and 196K market forecast.

Federal Reserve Chairman Jerome Powell, along with three other Fed officials, supported additional rate hikes on Thursday to address inflation concerns. However, mixed US data cast doubt on the Fed policymakers’ hawkish rhetoric, focusing instead on their dismissal of banking crisis concerns, which weighed on the US Dollar and the Fed’s outlook. Consequently, the CME’s FedWatch Tool now indicates a nearly 50% chance of a 0.25% rate hike in the May Fed meeting, down from 60% the previous day.

EUR/USD Technical Outlook

The EUR/USD demonstrates the market’s unease surrounding inflation as it approaches 1.0900, after recently hitting a one-week high, during early Friday trading.

Given the overbought RSI (14) and the Euro pair’s consistent inability to surpass the 1.0930-35 horizontal resistance zone, buyers may experience further disappointment if Eurozone inflation data weakens and/or the US Core PCE Price Index softens.

If the EUR/USD bulls disregard the RSI (14) conditions and overcome the 1.0935 barrier, supported by fundamental factors, there is a possibility of a rally towards the yearly peak reached in January, close to 1.1035.
In the meantime, a two-week-old rising support line, currently near 1.0850, limits the short-term EUR/USD decline.

Subsequently, the 50-SMA level around 1.0820 and the mid-March high near 1.0750 could serve as the final lines of defense for EUR/USD buyers. A breach of these levels may quickly send the rate plummeting towards the monthly low of approximately 1.0515.

In summary, the EUR/USD pair remains within bullish territory unless it breaks the 1.0750 level. However, the limited potential for an upward move emphasizes the importance of today’s inflation figures as key catalysts.