At the close of yesterday, the EUR/USD pair failed to break the support level at 1.1500 (the lower Bollinger band line on the four-hour chart) and therefore did not enter the 1.14 area. In the second half of the day, buyers seized the initiative and extinguished the southbound impulse. Although they too have no notable achievements—the pair is drifting in the mid-1.15 area—they accomplished their minimum program: sellers did not even manage to test the key support level. Donald Trump's peacemaking efforts, which persuaded Israel and Iran to lower the level of escalation, have weakened risk-off sentiment and put the dollar under background pressure.
And yet, longs in the pair still look risky. The bears have not capitulated but have merely made a tactical retreat ahead of key US inflation releases. May CPI and PPI data, to be published on Wednesday and Thursday, could provide additional support to the greenback and further strengthen an already favorable dollar fundamental backdrop.
According to the CME FedWatch tool, the market is almost 100 percent confident the Fed will keep the policy rate unchanged at the next two meetings — in June and July. By contrast, the outlook for September is less clear: the probability of a 25-basis-point hike is now estimated at roughly 40 percent. If the upcoming inflation releases prints in the green zone (especially core measures), hawkish expectations regarding further Fed action will grow again, and the dollar will once more enjoy heightened demand.
Preliminary forecasts indicate a high likelihood of that scenario. Most analysts expect the headline consumer price index to reach a three-year high of 4.2% year-on-year. Core CPI, excluding food and energy, is also expected to show an upward move to 2.9% year-on-year.
Leading indicators signal that core inflation may surprise traders on the upside, reaching the three-percent mark. A key signal here is an increase in the price's components of ISM business activity indices in both services and manufacturing, which traditionally lead consumer price dynamics. Continued wage growth (despite a modest slowdown in the rate to 3.4% in May) and a high level of job openings (7.62 million) also support inflation in the services sector. In addition, rising inflation expectations among households and businesses further raise the risk of price inertia.
All these signs increase the probability that core consumer prices will accelerate more than expected — to 3.0% or higher.
Market expectations are similar for May PPI, to be released on Thursday. Most experts expect the headline producer price index to speed up to 6.8% from 6.0% and core PPI to rise to 5.3% (after 5.2% in April). Again, if core PPI accelerates more than expected, the dollar will be well supported, including versus the euro.
In other words, the upside prospects for EUR/USD are highly uncertain. Long positions in the pair are therefore risky now, especially ahead of the CPI and PPI releases. Against a backdrop of rising hawkish expectations for Fed policy, the pair will remain under background pressure. Therefore, corrective price spikes are best treated as opportunities to open short positions. The key support level remains 1.1500 (the lower Bollinger band line on the H4 chart).
However, risks to the downside scenario remain: a potential US-Iran deal would be a kind of Damocles' sword for the southbound trend. For example, today Donald Trump again said the parties are very close to a strong and powerful agreement.
The market reacted cautiously to those words, which is understandable—according to CNN's calculations, the US president has said 37 times (!) that a deal with Iran is imminent. More than two months ago, on 7 April, Trump posted that the talks were at a very advanced stage but that two weeks were needed to polish and conclude the agreement. No resolution followed, yet in subsequent months he repeatedly and unambiguously suggested that a deal was at hand. Analysts surveyed say that there is no sign that today is any closer to the truth than 7 April. Positions remain far apart, and neither side appears prepared to accept broad unilateral concessions.
If the diplomatic track remains in its current sluggish format (without significant escalation or de-escalation), traders will focus on inflation data. The CPI and PPI reports are likely to support the dollar and, therefore, sellers of EUR/USD.
