EUR/USD falls back to probe 1.0700 despite hot EZ inflation, as US yield rally boosts buck into month-end

• EUR/USD has pulled lower on Monday as higher US yields boost the buck at the month’s end.
• The euro has weakened despite further hot EZ inflation figures which have underpinned ECB tightening expectations.
• The pair was last probing 1.0700, down from closer to 1.0800 on Monday.

Month-end flows plus hawkish commentary from Fed Board of Governors member Christopher Waller on Monday are being cited as lifting US bond yields as US market participants return from a long weekend this Tuesday. This is being cited as lifting the US dollar and weighing on EUR/USD, which has dropped back from Monday’s peaks near 1.0800 to test the 1.0700 level once again and is currently trading lower by about 0.6% on the day.

The drop on Tuesday comes despite above consensus Eurozone inflation figures (which weren’t too much of a surprise given hot numbers out of Germany and Spain on Monday). As a result, Eurozone money markets have lifted ECB tightening bets, and now foresee 115 bps of tightening by the end of the year versus 110 bps on Monday.

Whether the ECB actually delivers that much tightening this year is another thing, but the recent data supports the central bank’s recent shift in stance towards signalling rates returning to positive territory by the end of next quarter. ECB policymakers speaking on Tuesday doubled down on the stance that normalisation is warranted, though Ignazio Visco cautioned that tightening much be gradual in order to avoid so-called “fragmentation” (i.e. a blowout in periphery-core Eurozone bond yield spreads).

Ahead, focus turns to various tier two US data releases, including S&P/Case Shiller house prices and the May Chicago PMI and Conference Board Consumer Confidence surveys. US President Joe Biden is also set to meet Fed Chair Jerome Powell, another event markets will be scrutinising. Biden, a strong past proponent of Fed independence has promised not to seek “to influence its decisions inappropriately”, even as sky-high US inflation weighing on his approval rating.