EUR/USD corrects as Fed officials maintain hawkish interest-rate guidance

• EUR/USD drops below 1.0900 as the US Dollar rebounds after many Fed officials vow to maintain interest rates at their current levels for longer.
• Fed policymakers see one good inflation report as insufficient to change the trend.
• ECB’s Schnabel also highlighted risks from premature interest-rate cuts.

EUR/USD drops to 1.0840 in Friday’s European session as market sentiment over upcoming interest-rate cuts turns slightly cautious after Federal Reserve (Fed) policymakers supported keeping the monetary policy stance restrictive for a longer period. These comments helped the US Dollar lick its wounds after the sharp fall induced by the decline in the United States (US) inflation in April, as shown by the Consumer Price Index (CPI) report released on Wednesday.

The corrective move in the major currency pair seems purely the outcome of the US Dollar’s recovery. However, the appeal for the Euro also remains upbeat as European Central Bank (ECB) policymakers are also casting doubts over the need to extend the rate-cut cycle immediately after a widely anticipated June rate cut. 

In the early London session, ECB Board member Isabel Schnabel said the path beyond the June rate cut is uncertain. Schnabel added recent inflation data suggested that the last mile in the disinflation process is the most difficult, adding that she remained cautious about upside risks to inflation that could arise from premature rate cuts.

Daily digest market movers: EUR/USD comes down as US Dollar bounces back

• EUR/USD corrects from recent highs of 1.0900 as the US Dollar recovers after posting a fresh monthly low. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, finds buying interest near 104.00 and rebounds to 104.60.
• The USD Index recovers after a slew of Federal Reserve (Fed) policymakers emphasized the need to keep interest rates at their current levels for a longer period on Thursday. Fed policymakers seem to keep a broadly hawkish stance on the interest-rate outlook, stating that one good US inflation data after a series of disappointments could not turn the table to rate cuts.
• On Thursday, New York Fed Bank President John Williams said the monetary policy is restrictive and is in a good place. He doesn’t see any economic indicator suggesting the need to change the stance of monetary policy now. When asked about the inflation outlook, Williams said: “In the very near term, I don't expect to get that greater confidence that we need to see on inflation progress towards a 2% goal," Reuters reported.
• While markets aren’t yet fully convinced that the US is back on the disinflation path, there are increasing concerns that the US labor market is losing its strength, which could keep firm odds for rate cuts in the September meeting intact. The uncertainty about US job market strength has escalated due to rising weekly Initial Jobless Claims.
• The US Department of Labor reported on Thursday that individuals claiming jobless benefits for the first time for the week ending May 10 rose to 222K from the consensus of 220K. Although claims were lower than the prior reading of 232K, which was the highest level in eight months. Higher jobless claims indicate lower job opportunities or companies laying off employees or a mix of both. In April, the increase in Nonfarm Payrolls (NFP) was also significantly lower than estimates.

Technical Analysis: EUR/USD sets to test triangle breakout region

EUR/USD is gradually declining towards the breakout region of the Symmetrical Triangle formation, which is around 1.0830. The near-term outlook of the major currency pair remains bullish as a breakout of a triangle formation results in heavy buying volume and wider ticks. The shared currency pair seems well-established above the 50-day and 200-day Exponential Moving Averages (EMAs), which trade around 1.0780 and 1.0788, respectively.

The 14-period Relative Strength Index (RSI) has shifted into the bullish range of 60.00-80.00, suggesting a strong upside move ahead. Going forward, EUR/USD is expected to extend its upside towards the psychological resistance of 1.1000.