COMMENT-Fed, inflation bogeymen haunt EUR/USD longs

EUR/USD turned lower Thursday after striking a 10-session high as the latest U.S. inflation and employment data have investors leaning towards the Fed delaying rate cuts, potentially putting the 1.0450/1.0500 in the spotlight.

U.S. headline Q1 GDP came in below estimates but the GDP deflator and core PCE components increased more than expected, suggesting inflation may be running hot again.

Treasury yields (US2YT=RR), US10Y hit their highest since November 2023 on the back of the price data as well as drops in weekly and continuing claims.

The dollar's yield advantage over the euro increased sharply as German-U.S. 2-year spreads (US2DE2=RR) hit their widest since April 16 and neared the base of the channel they've been in since September 2023.

Short-term rates markets reacted by pricing only 34bps of Fed cuts for 2024, down from 45bps just Wednesday, pushing EUR/USD lower and increasing bearish technical signals.

EUR/USD fell away from the 21-DMA and top of the bear flag on daily charts. Daily RSI diverged on the day's high and a daily inverted hammer formed. Those signals reinforced bear signals from falling monthly RSI and monthly inverted hammer.

Investors are now focused on March PCE, the Fed's favored inflation gauge, which is due on Friday.

Above estimate PCE may see Fed hikes priced in and EUR/USD test 1.0450/1.0500.

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