EUR/USD rallies to fresh monthly highs into upper 1.0700s, bolstered by faltering buck, spicey EZ inflation

• EUR/USD hit fresh monthly highs in the 1.0770s on Monday as the buck continued to ease.
• Spicey German and Spanish HICP numbers also helped to underpin the euro by shoring up ECB tightening expectations.
• More Eurozone inflation data is out on Tuesday ahead of a busy week of tier one US data releases.

Whilst spicey German and Spanish HICP inflation numbers helping things for the euro, a positive tone to risk appetite and a subsequent continued broad weakening of the US dollar saw EUR/USD push convincingly above its 50-Day Moving Average for the first time since mid-February on Monday. The pair was last trading in the 1.0760s, up about 0.3% on the day in US holiday-thinned trade and at monthly highs.

Indeed, the pair looks set to close the month about 2.2% higher, which would mark its best one-month performance in over a year. EUR/USD’s rebound is even more impressive when viewed in the context of where it started – at rock bottom mid-month lows in the mid-1.0300s. The pair has bounced over 4.0% since May 13, driven by a combination of USD long-position squaring and a closing of the divergence in Fed/ECB policy tightening expectations.

In the past few weeks, US inflation data (both CPI and Core PCE) has added fuel to the idea that US inflation has now peaked, which eases the pressure on the Fed to tighten so aggressively in H2 2022 and 2023. Meanwhile, communication from the ECB has continued to get more hawkish, and in the wake of Monday’s hot inflation data, some are even talking about a hike being brought forward to next week’s meeting.

Focus remains on Eurozone inflation on Tuesday with the preliminary May numbers being released out of France and the Eurozone as a whole. Then there is a barrage of tier one US data scheduled for the rest of the week, culminating in the official May labour market report on Friday.

If the wage growth component of the labour market report shows signs of easing, this could further contribute to the peak inflation narrative and underpin further upside in EUR/USD. But the pair has run into an important area of resistance, with the March low around 1.0800 notable.