EUR/USD eyes more downside below 1.0540 as US PCE propels hawkish Fed bets

• EUR/USD is expected to show further weakness below 1.0540 as US inflation has rebounded.
• Higher-than-anticipated US consumer spending resulted in an intense sell-off in the US equities.
• ECB Lagarde has reiterated that a 50 bps interest rate hike announcement is on the table.

The EUR/USD pair is juggling in a narrow range above 1.0540 in the early Asian session. The major currency pair is likely to show more weakness after surrendering the immediate support of 1.0540 ahead. The downside bias for the shared currency pair is escalating after a surprise rebound in the United States Personal Consumption Expenditure (PCE) Price Index. A revival in the households’ spending in January has propelled the expectations that the Federal Reserve (Fed) will continue hiking rates till summer.

Investors dumped US equities after a higher-than-anticipated jump in consumer spending in January fueled the risk of more policy tightening by Fed chair Jerome Powell in March. S&P500 futures settled the week with losses of around 2.60%, portraying a risk-aversion theme.

Fed’s preferred inflation tool reported a surprise jump to 4.7% vs. the consensus of 4.3% and the former release of 4.7% on an annual basis. Consumer spending has jumped by 0.6% in January against a jump of 0.4% recorded in December. A strong employment cost index due to the tight labor market has fueled consumer spending due to higher funds with households for disposal.

The US Dollar Index (DXY) looks set to reclaim the critical resistance of 105.00 ahead amid the risk-off market mood. Meanwhile, rising expectations of more policy tightening by the Fed sent US Treasury yields higher. The return provided on 10-year US government bonds scaled to near 3.95%.

On the Eurozone front, European Central Bank (ECB) President Christine Lagarde reiterated the need for further interest rate hike by 50 basis points (bps) in March. ECB Lagarde cited “More tightening will be required if fiscal cooperation is absent.” She further added ''There is every reason to believe that we will do another 50 basis points in March.”