EUR/USD stays defensive above 1.0700 with eyes on ECB, US Inflation

• EUR/USD fades bounce off intraday low, struggles to reverse the previous day’s pullback.
• Absence of Fedspeak highlights US inflation as bets for 50 bps rate hike in September jumped last week.
• Record high Eurozone inflation pushes bulls to seek clues for ECB’s July rate-lift.
• Bank holidays in France, Germany may restrict intraday moves amid a light calendar elsewhere.

EUR/USD fades recovery momentum from intraday low as mixed sentiment joins cautious mood ahead of this week’s key data/events. Additionally, holidays in Germany, France, Switzerland and New Zealand also restrict the pair’s immediate moves. That said, the quote stays defensive around 1.0720 during the mid-Asian session on Monday.

The market’s indecision could be linked to upbeat factors concerning China and an increase in hawkish Fed bets.

Beijing’s readiness to ease the virus-led activity restrictions joins the US preparations for announcing tariff relief for China to underpin the positive mood.  “Dine-in service in Beijing will resume on Monday, except for the Fengtai district and some parts of the Changping district, the Beijing Daily said. Restaurants and bars have been restricted to takeaway since early May,” reports Reuters. On the other hand, US Commerce Secretary Gina Raimondo said, per Reuters, “President Joe Biden has asked his team to look at the option of lifting some tariffs on China that were put into place by former President Donald Trump, to combat the current high inflation.”

On the contrary, Friday’s strong US Nonfarm Payrolls (NFP) join the recently hawkish Fedspeak to propel the odds of a third 50 bps rate hike in September to 75% from 35% appeared last week, which in turn weighed on market sentiment.

US Nonfarm Payrolls (NFP) came in 390K for May, more than 325K expected but lesser than the upwardly revised 428K previous readouts. Further, the Unemployment Rate remained unchanged at 3.6% versus expectations of a slight decline to 3.5%. Additionally, the US ISM Services PMI fell to 55.9 in May, versus 56.4 market consensus and 57.1 flashed in April. Following the data, Cleveland Fed President Loretta Mester crossed wires while saying that the one problem that the Fed has is inflation. The policymakers also added that the risks of a recession have gone up.

Against this backdrop, Wall Street benchmarks closed in the red and the US 10-year Treasury yields posted the first weekly gain in three to portray the risk-off mood the previous day. However, the S&P 500 Futures rise half a percent to 4,126 and the US 10-year Treasury yields dropped 1.3 basis points (bps) to 2.942% at the latest.

Looking forward, Thursday’s European Central Bank (ECB) monetary policy and the US Consumer Price Index (CPI) for May, up for publishing on Friday, appear the key catalysts of the week. While the hawkish ECB  can help EUR/USD to extend the latest run-up, the increasing market prices of the Fed’s 0.50% rate hike in September could gain additional support from upbeat inflation numbers. It should be noted that US inflation expectations, as per the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, rose for three consecutive days in the last to challenge the highest levels since early May by the end of Friday’s North American session.

Also read: EUR/USD Weekly Forecast: Gear up for more central banks’ noise

Technical analysis

EUR/USD moves remain confined between a six-week-old descending resistance line and the 200-SMA on the four-hour chart, respectively around 1.0760 and 1.0610.