EUR/USD pares weekly loss above 1.0900 amid US debt ceiling woes ahead of inflation cues

• EUR/USD licks its wounds at the lowest levels in a month, braces for the biggest weekly loss since late February.
• ECB, Fed policymakers try to show hawkish moves but challenges to sentiment favor US Dollar.
• US CPI, PPI have been unimpressive and highlight importance of Michigan CSI, inflation expectations for clear directions.

EUR/USD retreats from an intraday high of 1.0925 but stays sluggish during early Friday in Europe as traders lick their wounds on the way to posting the biggest weekly loss in three months. That said, the US Dollar’s latest rebound and a lack of confirmatory hawkish signals from the European Central Bank (ECB), as well as fears of the US debt ceiling, keep the Euro bears hopeful at the lowest levels in a month.

Multiple ECB Officials including President Christine Lagarde, tried to defend the bloc’s central bank’s hawkish bias as some among the team consider the latest easing in the European and German statistics to suggest nearness to the policy pivot. With this in mind, Bloomberg quotes people familiar with the debate while saying, “ECB officials are starting to accept that interest-rate increases might need to continue in September to bring inflation fully under control.” ECB policymaker and Bundesbank Chief Joachim Nagel reaffirmed on Thursday, the “meeting-by-meeting approach is the right path for the ECB.” The policymaker also added that they're moving closer to restrictive territory but not there yet.

On the other hand, Minneapolis Fed President Neel Kashkari mentioned on Thursday that inflation has eased but warned it is above the Fed's 2% target while speaking at the Marquette CEO Town Hall in Michigan. 

That said, the recently escalating market fears surrounding the US debt ceiling expiry and banking fallouts, seem to allow the US Dollar to brace for the first weekly gain in three while pushing down the US Treasury bond yields for the third consecutive week.

It should be noted that the postponement of the debt ceiling talks between US President Joe Biden and House Speaker McCarthy and a slump in the share price of PacWest Bancorp appear the main negative developments to weigh on the sentiment. Additionally, warnings from US Treasury Secretary Janet Yellen and Beth Hammack, Chair of the Treasury Borrowing Advisory Committee and Co-Head of Goldman's Global Financing Group, about US default, also threaten the risk profile.

Alternatively, the market’s consolidation amid a light calendar and cautious mood ahead of today’s preliminary readings of the University of Michigan’s (UoM) Consumer Sentiment Index (CSI) for May, as well as the UoM 5-year Consumer Inflation Expectations for the said month, prod the US Dollar buyers of late. Should the scheduled inflation clues and central bank comments manage to convince markets of the ECB’s comparatively more hawkish policy bias than the Fed, the EUR/USD may witness further upside. However, the aforementioned risk catalysts will still be the key to watching for clear directions.

Also read: Michigan Consumer Sentiment Index Preview: Modest improvement not enough to boost the mood

Technical analysis

Despite the latest corrective bounce, the EUR/USD pair remains well below the 1.0970 resistance confluence comprising the 21-day Exponential Moving Average (EMA) and the bottom line of a one-month-old bullish channel. The same joins bearish MACD signals to keep Euro sellers hopeful.

Also read: EUR/USD Price Analysis: Euro bears struggle to justify 1.0970 support break