EUR/USD clings to gains in countdown to US Inflation

• EUR/USD holds gains tight range above 1.0800 due to multiple tailwinds.
• Fed Powell’s caution on the US labor market pushes the US Dollar on the backfoot.
• The Euro gains as the far right’s defeat eases upside risks to widening French financial crisis.

EUR/USD turns sideways around 1.0800 in Wednesday’s European session after a modest corrective move from an almost four-week high of 1.0850. The major currency pair shifts to the sidelines as investors await the United States (US) Consumer Price Index (CPI) data for June, which will be published on Thursday.

Economists expect that core inflation, which excludes volatile food and energy items, grew steadily by 0.2% and 3.4% on a monthly and annual basis, respectively, in June. Annual headline inflation is estimated to have decelerated to 3.1% from May’s reading of 3.3%, while the monthly figure is expected to have grown by 0.1% after remaining unchanged previously.

The inflation data will provide cues as to whether current expectations that the Federal Reserve (Fed) will start reducing interest rates from the September meeting are appropriate.

Meanwhile, Fed Chair Jerome Powell signaled in his commentaries at the semi-annual Congressional testimony on Tuesday that rate cuts are not appropriate until policymakers gain significant confidence that inflation is on course to return to the desired rate of 2%.

However, Powell warned about easing US economic strength as the labor market loses momentum. Powell said "Labor market conditions have cooled considerably compared to where they were two years ago," and added that the US “is no longer an overheated economy.”

Daily digest market movers: EUR/USD gains as ECB’s subsequent rate-cut bets ease

• EUR/USD holds onto gains above 1.0800, inspired by a weak US Dollar (USD) and a decent recovery in the Euro, as the Marine Le Pen-led far-right National Rally fails to gain an absolute majority in French elections. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, faces pressure to extend recovery above 105.20.
• The far-right misses an outright majority despite leading in the first round, resulting in diminished fears of a widening French financial crisis. However, uncertainty about fiscal adjustments and the distribution of ministries remains high as the economy will be administered by a coalition government. Economists expect French President Emmanuel Macron's centrist alliance will join hands with the left wing, also known as the New Popular Front, led by Jean-Luc Mélenchon.
• Meanwhile, sliding expectations of subsequent rate cuts by the European Central Bank (ECB) keep the Euro on the front foot. ECB policymakers continue to refrain from committing to a pre-defined rate-cut path, with fears that an aggressive policy expansionary stance could reverse the disinflation process.
• On Tuesday, ECB governing council member and Governor of the Bank of Italy Fabio Panetta said the central bank could gradually reduce interest rates without any hiatus to slowing inflationary pressures. Panetta added that policy tightening done in the past is still impacting demand, output, and inflation.

Technical Analysis: EUR/USD steadies above 1.0800

EUR/USD trades in a tight range slightly above the round-level support of 1.0800 as investors stay on the sidelines ahead of the US CPI report for June. The major currency pair stabilizes above the 20-day and 50-day Exponential Moving Averages (EMAs), which trade around 1.0750 and 1.0770, respectively. The overall trend of the shared currency pair has also strengthened as it has jumped above the 200-day EMA, which trades around 1.0800.

A Symmetrical Triangle formation on the daily timeframe exhibits a sharp volatility contraction, which indicates low volume and narrow ticks.

The 14-day Relative Strength Index (RSI) reaches 60.00. Should the bullish momentum be triggered if it breaks above 60.00?