EUR/USD Reacts to US Dollar Strength and ECB Tone | FUNDAMENTAL

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FX:EURUSD   Euro / U.S. Dollar
The EUR/USD pair experienced a pullback from its lowest levels in six weeks as the US Dollar gained momentum, reaching nearly a two-month high. The Euro's decline was influenced by softer EU inflation data and a downbeat tone from ECB's de Cos. Meanwhile, the US Dollar benefited from optimism surrounding a potential extension of the US debt limit and increased expectations of a June rate hike by the Federal Reserve (Fed).

Market sentiment dwindled heading into the European session on Thursday, further pressuring the EUR/USD pair, which was trading near 1.0840, down 0.05% intraday. Traders expressed doubts about the ECB's hawkish bias compared to the growing likelihood of a Fed rate hike in June.

Recent interest rate futures indicated a 20% probability of a 0.25% rate increase by the Fed in June, contrasting with expectations of no such actions in 2023. This hawkish sentiment was influenced by positive US economic data and hawkish comments from Fed officials.

US Housing Starts for April were slightly below expectations, with figures of 1.401 million compared to the anticipated 1.4 million. Building Permits for the same month also declined, reaching 1.416 million compared to the previously revised 1.437 million. However, upbeat US Retail Sales and Industrial Production data for April supported the hawkish stance of the Fed and fueled risk appetite. Federal Reserve Bank of Chicago President Austan Goolsbee and Atlanta Fed President Raphael Bostic were among the officials who reiterated concerns about inflation and favored the EUR/USD bears.

In the Eurozone, the final readings of April's inflation based on the Harmonized Index of Consumer Prices (HICP) showed a slight decrease in the monthly rate to 0.6% compared to the previous estimate of 0.7%. However, the annual forecasted increase of 7.0% was confirmed. Following the inflation data, ECB policymaker and Bank of Spain's Governor Pablo Hernandez de Cos stated in an interview that "The persistence of higher inflation would slow the recovery and would very likely lead to further tightening in the euro area."

Apart from the Fed-ECB dynamics, comments from US President Joe Biden and House Speaker Kevin McCarthy reassured the markets that they would work together to avoid a catastrophic default. This boosted market sentiment and supported the US Dollar. The US Dollar Index (DXY) remained mildly bid near 102.90, marking its highest levels in seven weeks.

Looking ahead, market participants are anxiously awaiting ECB President Christine Lagarde's speech and US President Biden's assurance of a budget solution by the end of Sunday. These factors, combined with second-tier US data and discussions on the US debt limit, will likely shape the direction of the EUR/USD pair in the near term.
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