EUR/USD bulls pressured back below 1.1000

• EUR/USD sits in limbo as the US Dollar creeps higher. 
• ECB and Fed sentiment is the driving force. 

EUR/USD rallied on the back of the US Consumer Price Index and reached a high of 1.1006 on the day from a low of 1.0941. 

US CPI and Fed implications

Headline CPI growth in the US ended lower to 4.9% in April from 5% in March. 'Core' inflation excluding food and energy products also moderated, to 5.5% from 5.6% in March. ´´April core CPI prices suggest underlying inflation is likely to remain sticky as we head into the June Federal Open Market Committee meeting, supporting our view that a final 25bp rate increase to 5.25%-5.50% remains on the table,´´ analysts at  TD Securities argued. ´´However, we also acknowledge that the FOMC's decision has become especially data-dependent, with activity/banking related data gaining more prominence on the Fed's dashboard post-SVB.´´ 

´´Bottom line,´´ analysts at RBC Economics said, ´´inflation trends in the US continue to head the right direction, but still have a long way to go before they reach the Fed's 2% target.´´

´´Labour market conditions still look strong, but are showing cracks under the surface, and tension remains among regional banking credit markets.´´

´´Increasingly, we expect the Federal Reserve will have to balance risks between sticky inflation, and slowing growth momentum / tighter financial conditions. We continue to expect the move last week to be the last one this cycle, leaving the Fed on hold until later this year,´´ the analysts argued. 

In this regard, analysts at Brown Brothers Harriman noted that the ´´Federal Reserve easing expectations are starting to get pared back.´´

´´At the start of last week, swaps market was pricing in a Fed Funds range between 4.0-4.25% in 12 months.  Earlier, it was as low as 3.5-3.75% but now it's back in the 3.75-4.0% range in 12 months.  Three cuts by year-end were fully priced in at the start of this week but the odds of a third hike have fallen to around 60% currently,´´ the analysts explained. 

´´That said, market expectations of a Fed pivot are misguided and must be repriced.  Fed officials are likely to continue pushing back against this dovish take but it will really be up to the data.´´

ECB in view

Meanwhile, the European Central Bank was later to start hiking so there is the consensus that the ECB should be later to pause. The ECB dialed back to a 25 bp hike in May but suggested further rate increases should be expected. ´´We continue to look for two more 25 bp hikes with a terminal deposit rate of 3.75%,´´ the analysts at RBC Economics argued. 

´´A further slowdown in bank lending is expected to weigh on business investment in particular and we’ve lowered our euro area growth forecasts for the second half of this year and 2024,´´ the analysts said, adding:

´´But that isn’t expected to keep the ECB from delivering further rate increases in the near term. The central bank’s May policy statement implied multiple further rate hikes are needed to ensure monetary policy is sufficiently restrictive, consistent with our call for another 50 bps of tightening.´´