EUR/USD retreats from five-week top below 1.0800, Eurozone inflation eyed

• EUR/USD retreats from monthly top, probes three-day uptrend.
• Market sentiment improved on China news, easing bets on Fed’s aggressive rate hikes.
• Germany’s inflation gauge refreshed multi-year high in April, EU Consumer Confidence edged up in May.
• Strong inflation numbers can add strength to hawkish ECBSpeak, supporting further upside of the pair.

EUR/USD bulls appear to turn cautious at a monthly high, pausing a three-day uptrend, as traders await the Eurozone inflation data, as well as full markets. That said, the major currency pair eases from the multi-day peak of 1.0786 to 1.0777 by the press time of the early Asian session on Tuesday. Even so, the quote remains on the bull’s radar amid broadly softer US dollar and upbeat concerns surrounding the bloc.

While the market’s anxiety ahead of the key data and the US traders’ return probes the EUR/USD bulls of late, the currency pair is far from welcoming bears. The rose to the highest levels since April 25 the previous day, also rising for the third consecutive day, as the US dollar weakness joined optimism surrounding the European Central Bank’s (ECB) rush toward a rate hike in July.

The US Dollar Index (DXY) refreshed its monthly low to 101.29, before bouncing off to 101.34, during the US Memorial Day Holiday. The greenback’s fall could be linked to the recently easing odds of the Federal Reserve’s (Fed) aggressive rate hikes, considering the downbeat inflation and growth numbers.

On the other hand, the first readings of Germany’s annual inflation, per the Harmonised Index of Consumer Prices (HICP), rose to 8.7% in May versus 8.0% expected and 7.8% prior. It’s worth noting that the Eurozone Consumer Confidence also increased to 105.0 in May from a revised down 104.9 figures for April.

It’s worth noting that firmer inflation data from the bloc back the recently hawkish comments suggesting a July rate hike from the ECB policymakers. The same contradicts the US conditions where the latest PCE Core Price Index data, the Fed’s preferred gauge of inflation, came in softer and failed to favor some of the hawkish Fed members. On Monday, Fed Board of Governors member Christopher Waller said that he supports lifting interest rates by another 50 bps at the next several Fed meetings and that the policy rate should be above neutral by the end of the year to reduce demand, reported Reuters. 

Other than the US dollar weakness and upbeat concerns for the Euro, China’s gradual opening up of the economy from the covid-led activity restrictions also underpin the risk-on mood and propel the EUR/USD prices.

Moving on, Eurozone HICP YoY is expected to refresh multi-year high with 7.7% figures versus 7.4% prior whereas the HICP-X F, E, A, T, also known as core inflation, bears the consensus of reprinting 3.5% YoY figures. Additionally, Chicago Purchasing Managers’ Index and Dallas Fed Manufacturing Business Index for May could also entertain EUR/USD traders.

Given the upbeat expectations from the Eurozone data, the major currency pair may witness further upside. However, the US traders’ reaction to the latest market sentiment should be observed.

Technical analysis

A daily closing beyond the 50-DMA, around 1.0740 by the press time, directs EUR/USD towards a downward sloping trend line from February 10, close to 1.0800.