COMMENT-EUR/USD longs see further alignment of the stars

EUR/USD turned higher Tuesday and struck a 1-month high even after U.S. data indicating inflation may be rising again, suggesting longs are growing more confident that Fed rate cuts could be on the horizon.

Headline April producer price index came in +0.5% month-on-month versus estimates for +0.3%, spiking U.S. yields higher (US2YT=RR), US10Y, initially boosting the dollar.

Year-on-year only met estimates of 2.2% however and March y/y and m/m saw significant downward revisions, which fueled speculation disinflation may be returning.

Investors appeared to place more significance on year-on-year data and the revision and sent yields lower, with the dollar following suit.

Short-term U.S. rate markets went back to pricing in two Fed rate cuts for 2024.

Investor attention now turns to U.S. April PPI and retail sales as well as weekly claims reports.

Should those data indicate disinflation has returned and the jobs market is softening, investors may price in deeper Fed cuts, pulling yields lower, further eroding the dollar's rates advantage over the euro. That could push German-U.S. spreads (US2DE2=RR) through resistance near -186/-185bps.

EUR/USD could then extend its recent rally and clear the daily cloud and April's monthly high.

Breaks of those impediments could intensify short covering, which could lead to a test of the 1.1050/1.1100 area.

For more click on