If someone hoped that the May US inflation report would help Federal Reserve Chairman Jerome Powell unite the divided Federal Open Market Committee, they were disappointed. The slowdown in consumer prices to 4% is a strong argument in favor of the US central bank to take a pause in its rate hiking cycle. At the same time, the core inflation at 5.3% indicates that the central bank's work is far from over. It is not surprising that the reaction of EUR/USD to this important event on the economic calendar was uneasy.
If FOMC hawks do not see the need to skip a move in June, centrists, on the contrary, believe that a pause is necessary. Monetary tightening affects the US economy with a time lag. It takes time to feel its impact. And the Fed wants to buy that time, gather new data, and then make decisions. In this regard, the slowdown in CPI is a strong argument in favor of doing just that. After the release of consumer price data, the futures market increased the probability of keeping the federal funds rate unchanged in June from 79% to 93%.
US inflation dynamics
Experts at Bloomberg are leaning towards the same opinion. 65 out of 66 specialists believe that following the June FOMC meeting, the borrowing costs will remain at 5.25%. It seems that the Fed has no choice but to satisfy the desires of both the market and economists.
As for the slowdown in core inflation, not to 5.2% as predicted, but to 5.3% year-on-year, such dynamics serve as a strong argument in favor of keeping rates unchanged for an extended period of time. However, the Fed has long been talking about this. Investors didn't believe it for a long time, but then they were forced to believe. The absence of a dovish pivot in 2023 is a bullish argument for the US dollar, although it is largely already priced into EUR/USD quotes.
Similarly, the increase in the deposit rate by 25 basis points to 3.5% at the June meeting of the Governing Council is anticipated by 37 out of 38 Bloomberg experts. The question is whether the European Central Bank will be willing to talk about a pause in the future. Inflation in the eurozone is slowing down, but the risk of a recession on the horizon of 2022-2023 indicates that the risks of pushing too hard are high.
Thus, investors are already aware of the verdicts of the Fed and the ECB even before they are delivered. Therefore, the dynamics of EUR/USD will be determined not by how much interest rates will be raised, but by the rhetoric of Powell and ECB President Christine Lagarde in their press conferences following the central bank meetings. In the Fed's case, the updated FOMC forecasts for the federal funds rate will also be of great importance.
Technically, failure to overcome significant resistance at 1.081-1.0815 is a sign of the bulls' weakness and is a reason to sell. However, climbing above this level or a rebound from a fair value of 1.0775 could attract new buyers.
