EUR/USD defends 1.0500 on easing calls of ECB vs. Fed divergence, focus on US PPI

• EUR/USD pauses two-day downtrend but holds lower grounds inside fortnight-long trading range.
• Hawkish ECBspeak contrasts mixed comments from Fed policymakers, strong US inflation keep bears hopeful.
• ECB’s Lagarde, de Guindos teased end of asset purchases in early Q3, indirectly suggest July rate hike.
• US PPI for April could justify 75 bps Fed rate hike calls, could propel USD towards fresh multi-year high.

EUR/USD stays on the back foot around the intraday low, keeping the two-week-old trading range, as it defends the 1.0500 threshold heading into Thursday’s European session. That being said, the major currency pair refrains from stretching the previous two-day downtrend as Euro bulls brace for a return after a long time, despite the recovery being at the nascent stage.

The regional currency seemed to rely on the recently hawkish comments from the European Central Bank (ECB) policymakers. Multiple European Central Bank (ECB) officials, including President Christine Lagarde and Vice President Luis de Guindos, flagged fears of inflation while also fueling calls for the July rate hike. ECB’s Lagarde said, “My expectation is that APP should be concluded early in Q3; followed by a rate hike that could come just ‘a few weeks’ later.” On the same line was ECB Vice President de Guindos who said that inflation is likely to remain at the 4%-5% range at the end of the year in the eurozone. “The debt-buying programme, the Asset Purchase Programme (APP), is likely to stop in July, de Guindos further added per Reuters.

Also keeping the EUR/USD buyers hopeful are the signals from the options market. The one-month risk reversal (RR), the ratio of calls to puts, prints the biggest daily figures in a week while also bracing for the heaviest weekly jump in two months, per the latest data from Reuters. The daily and weekly RR are 0.263 and 0.413 respectively.

On a different page, the US dollar struggles to cheer firmer inflation numbers, despite the latest uptick near a 20-year high, as policymakers have recently stepped back from bold calls. During early Thursday in Asia, the previously hawkish Federal Reserve Bank of St. Louis James Bullard mentioned that he ''won't emphasize single inflation report too much but inflation is more persistent than many have thought.''

Elsewhere, covid woes and softer yields seem to underpin a mixed session, which in turn keep the markets directed towards the US dollar buying, amid hopes of the Fed’s 70 bps rate hike.

Having witnessed a whipsaw move in the US inflation and speeches from ECB policymakers, EUR/USD traders eye monthly prints of the US Producer Price Index (PPI) for April, expected 10.7% YoY versus 11.2% prior. Should the factory-gate inflation also portray the increasing price pressure the hawkish Fed chatters could help the USD to renew its 20-year high.

Technical analysis

A downward sloping trend line from March 31, around 1.0560 by the press time, restricts the immediate upside of the EUR/USD prices. On the contrary, bears need validation from 1.0480 to prosper on the charts.