EUR/USD shoots to near 1.0820 as US PPI deflated wider than anticipated

• EUR/USD has jumped strongly to near 1.0820 as US PPI has softened significantly inspired by lower gasoline prices.
• US monthly headline PPI has registered deflation while core PPI has maintained its pace at 0.2%.
• The ECB is expected to raise interest rates by 25bps to 4% in order to sharpen its quantitative tools in the battle above 6% inflation.

The EUR/USD pair has accelerated dramatically to near 1.0820 after the United States Producer Price Index (PPI) data shows wider-than-expectations deflation. Monthly headline PPI contracted by 0.3% in May while the street was anticipating a 0.1% contraction. Investors should note that the economic data reported a pace of 0.2% in April. Annualized headline PPI has softened to 1.1% vs. the consensus of 1.5% and the prior release of 2.3%.

Contrary to that, US monthly core PPI has maintained its pace at 0.2% as expected by the market participants. The annualized core PPI has decelerated to 2.8% against the expectations of 2.9% and the former release of 3.1%.

The impact of weak oil prices is clearly visible in extremely soft PPI figures. Firms have passed on the impact of the sheer decline in gasoline prices to the end consumers as the street has not recognized any sign of a slowdown in the overall demand yet.

It looks like in the list of soft inflation, easing labor market conditions, and weak economic activities, decelerated PPI has been added, which would propel the need of skipping interest rate hikes by the Federal Reserve (Fed). The US Dollar Index (DXY) has attracted significant offers after softer-than-anticipated and has dropped below the crucial support of 103.00.

On the Eurozone front, investors are awaiting the interest rate decision by the European Central Bank (ECB). ECB President Christine Lagarde is expected to raise interest rates by 25 basis points (bps) to 4% in order to sharpen its quantitative tools in the battle above 6% inflation.

Economists at Danske Bank expect a pause by the Fed could pose near-term upside risks to EUR/USD, but we still maintain a bearish view on the cross towards the second half of CY2023.