EUR/USD Under Pressure: Strong US Data, Rising Yields Lift Dollar to May Highs

EUR/USD

​The EUR/USD pair is under pressure after a series of strong US macroeconomic releases and increasing demand for the US dollar as a safe-haven asset. US inflation data last week was above expectations, lowering the odds of US Fed rate cuts in the near term and supporting US Treasury yields. Against this backdrop, the dollar has been strengthening for several consecutive sessions and the DXY index has reached new local highs for May.

https://www.cnbc.com/cryptoworld/

Fed vs ECB; the market prefers the dollar again

The main driver for the EUR/USD drop is the change in monetary policy expectations. Markets are slowly pricing in a less aggressive Fed easing. The eurozone economy is still fragile, particularly Germany's industrial sector. There are occasional hawkish signals from the ECB but investors doubt the central bank will be able to maintain a tight stance for long in the face of slowing growth and recession risks. Analysts say the policy divergence between the Fed and the ECB is tilting again in favor of the dollar.

Oil and geopolitics add to volatility

The euro is also under pressure due to tensions in the Middle East and higher energy prices. This is particularly problematic in Europe, where high prices for oil and gas are worsening the outlook for inflation and the economy. Market risk-off sentiment has risen, with investors shedding risk assets and returning to dollar-denominated instruments. Still limits the EUR/USD recovery potential even in phases of temporary dollar weakness.

What’s next for the EUR/USD

The market is still short term bearish EUR/USD. The euro is likely to remain under pressure as long as US economic data remains resilient and the Fed remains cautious about rate cuts. The market will be watching US inflation figures that are due out, comments from Fed officials and signals from the ECB ahead of their next meetings.

With the current market conditions participants see scope for further downside towards 1.1600-1.1550 area, where rebounds to 1.1650-1.1670 are likely to continue attracting selling interest. As I warned earlier in the article, EUR/USD remains above 1.1700 as pressure mounts. The lack of bullish momentum ultimately triggered long liquidation.