EUR/USD tumbles towards 1.0500 on risk-aversion and mixed US data

• The euro records substantial losses vs. the greenback, down 1.81% in the week.
• Stagflation looms as US inflation accelerates, and consumers’ pessimism increases.
• EUR/USD Price Forecast: Daily close below 1.0532 would send the major tumbling for a retest of YTD lows at around 1.0340.

The EUR/USD nosedives and approaches the 1.0500, a level not seen since mid-May, following a higher-than-expected US inflation report, which topped estimations and opened the door for an aggressive Fed tightening cycle. At 1.0521, the EUR/USD trades near three-week lows, down 0.82% during the North American session.

US inflation approaching 9% paves the way for an aggressive Fed

Risk-aversion struck the markets following the release of May’s Consumer Price Index (CPI), which is getting closer to hitting 9% YoY after stabilizing for two months at around 8.3%. In the same report, the core CPI, which excludes volatile items like food and energy, increased by 6% YoY, higher than the 5.9%.

The greenback is rising on expectations that the US Federal Reserve will keep hiking rates faster. Reflection of the previously-mentioned is the US 10-year Treasury yields, rising to 3.178%, up by 23 basis points, underpinning the buck. The US Dollar Index reclaimed the 104.000 mark and is gaining almost 2%.

Analysts at Capital Economics wrote, “The surge in energy prices this month means that headline inflation will remain close to 8.6% in June. Together with the continued strength of the latest activity data, that bolsters the argument of the hawks at the Fed to continue the series of 50bps rate hikes into September and beyond, or even to step up the size of rate hikes at coming meetings.”

“The bigger increases in core prices a year ago means that core inflation still edged down to 6.0%, from 6.2%, but there is very little in the details of this report to suggest that inflationary pressures are easing,” Capital Economics wrote.

Late in the day, the University of Michigan reported June’s consumer sentiment preliminary numbers. The survey plunged to 50.2, lower than the 58.4 in May, showing consumer pessimism. Additionally, inflation expectations uptick to 5.4% from 5.3% in the previous study.

Now with the ECB meeting in the rearview mirror and elevated inflation in the US, the scenario of the Fed hiking 50 bps in June, July, and September is on the cards. So in the near-term, additional USD strength is expected, opening the door for further losses and a retest of EUR/USD’s 2022 YTD lows.

EUR/USD Price Forecast: Technical outlook

The EUR/USD remains on the defensive, battling at May 20 daily lows at 1.0532. A daily close below the latter leaves the major vulnerable to further selling pressure. The RSI around 40, with enough room before reaching oversold conditions, reinforces the previously mentioned scenario.

Therefore, the EUR/USD first support would be 1.0500. Break below would expose the May 19 daily low at 1.0460. Once cleared, the EUR/USD might tumble to challenge the YTD low at 1.0340.