EUR/USD Outlook: Bearish Bias and Impact of Powell's Guidance

On Tuesday, the EUR/USD pair reached a peak above 1.0820 following the release of US inflation data, but it later retraced to around the 1.0780 level. The pullback occurred amidst the backdrop of elevated government bond yields and an appetite for risk. Despite the decline during the American session, the pair ended the day with a positive tone, although significantly below its peak. The overall bias remains bullish; however, it is anticipated that volatility will be high in light of the upcoming FOMC meeting on Wednesday and the European Central Bank (ECB) meeting on Thursday.

German inflation data confirmed a 6.1% annual increase in May, which was a decrease from April's 7.2%. These figures were in line with expectations and marked the lowest level since March 2022. Another report revealed an unexpected improvement in the German ZEW survey for June, with the index rising from -10.7 to -8.5. On Wednesday, Germany is scheduled to release the May Wholesale Price Index, while Eurozone Industrial Production data is also expected. The ECB is anticipated to raise rates by 25 basis points during their meeting on Thursday.

The focal point on Wednesday was the US consumer inflation figure. The Consumer Price Index (CPI) showed a 0.1% increase in May, below the anticipated 0.2%, and the annual rate slowed to 4% from 4.9%, marking the lowest level since March 2021. These data points indicate that inflation in the US continues to decelerate, providing the Federal Reserve with ample room to pause its tightening cycle during their meeting on Wednesday. Market expectations now point to a 25 basis point hike in July, contingent on robust consumer and employment data. Additionally, more inflation data will be released in the US on Wednesday with the Producer Price Index.

Following the CPI report, the US dollar initially weakened but then recovered amid increased risk appetite and rising government bond yields, including Treasuries. The direction of the EUR/USD pair in the coming hours is likely to be influenced by the movements of the US dollar ahead of the FOMC statement. If the Federal Reserve maintains its expected stance, the market's attention will shift to the economic projections and the guidance provided by Chair Powell. Our current view still leans towards a bearish impulse for the EUR/USD pair.