The EUR/USD currency pair is trading in positive territory near the 1.1195 level in Wednesday’s Asian session, marking a notable rebound from its earlier losses. This uptick is primarily driven by recent US economic data and geopolitical developments that have shifted market sentiment, easing concerns of a global recession and reducing the likelihood of rate cuts by the European Central Bank (ECB).
An expert perspective on this topic is laid out by TelaraX in their analysis.
US CPI Inflation Data Below Expectations
One of the main catalysts behind the Euro’s (EUR) strength is the release of the US Consumer Price Index (CPI) data for April. The CPI rose by 2.3% YoY in April, which was below the market consensus estimate of 2.4%. This marked a slight deceleration from March’s figure of 2.4%, and it was the lowest reading since February 2021. Investors reacted positively to the data, as a lower-than-expected inflation reading suggests that US price pressures may be easing.
The core CPI, which excludes volatile food and energy prices, rose 2.8% YoY, matching the previous reading and market expectations. Despite this, the initial market reaction saw the US Dollar (USD) lose ground against its major counterparts, including the Euro. The cooling inflation report has led traders to reduce expectations of aggressive interest rate hikes by the Federal Reserve, which contributed to the weakness in the USD.
US-China Trade Agreement Eases Recession Fears
In addition to the inflation data, a significant development in US-China relations has also weighed on the USD. After two days of negotiations in Geneva, the US and China reached an agreement to reduce tariffs on each other’s imports. The US lowered tariffs on Chinese goods to 30% from 145%, while China cut tariffs on US goods to 10% from 125%.
This move has sparked optimism that trade tensions between the two largest economies in the world may ease, reducing the potential for a prolonged trade war. As a result, traders are dialing back their bets on an impending global recession, which has translated into a more favorable outlook for risk assets. This has indirectly supported the Euro as the broader market sentiment turned more positive.
ECB Rate Cut Bets Subside
Another factor that has strengthened the Euro is the shift in expectations regarding ECB monetary policy. As concerns over trade tensions and geopolitical risks begin to subside, traders have reduced their bets on the European Central Bank (ECB) cutting interest rates shortly. A few weeks ago, market participants were pricing in ECB rate cuts as a response to the potential economic impact of US tariffs on the European economy.
However, following the latest easing of trade tensions, money markets now see a higher chance that the ECB will hold rates steady, with expectations for a deposit facility rate of 1.80% by the end of the year, which is slightly above the levels seen in mid-April. This has prompted traders to reassess their positions, increasing demand for the Euro and pushing the EUR/USD pair higher.
The Role of Upcoming Economic Data
Looking ahead, traders will closely monitor the German Harmonized Index of Consumer Prices (HICP) data for April, which is set to be released later on Wednesday. The HICP is an important gauge of Eurozone inflation and could provide fresh insights into the inflationary pressures in the Eurozone. A higher-than-expected HICP print could further support the Euro, as it may signal that inflationary trends in the region are more robust than previously anticipated.
Additionally, economic data from the US will remain a key focus for traders. Any signs of continued economic strength or weakness in the coming weeks could influence market sentiment and drive USD price action.
Technical Outlook for EUR/USD
From a technical perspective, the EUR/USD pair is currently trading near the 1.1195 level, which represents a strong resistance zone. A further upside move towards the 1.1200 handle could trigger additional buying pressure, especially if momentum continues to favor the Euro. On the downside, the 1.1150 support level remains a key area to watch for potential retracements or corrections.
Traders will be looking for any signs of bullish continuation or reversal patterns to gauge the next significant move in the pair. A break above 1.1200 could open the door for a test of the next resistance level at 1.1250, while a decline below 1.1150 might signal a deeper pullback.
Conclusion
The EUR/USD pair has gained significant ground, trading near 1.1195 in Wednesday’s session, as risk appetite returns to the markets. The recent cooler-than-expected US CPI data has weakened the US Dollar, while optimism surrounding US-China trade talks and reduced ECB rate cut bets have provided support to the Euro.
As traders await key economic data from both the Eurozone and the US, the outlook for EUR/USD remains bullish in the short term, with potential for further gains if market sentiment continues to favor the Euro.
