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Euro Sinks as US Dollar Gains on Inflation Fears Boosting Yields. Where to for EUR/USD?

Euro Sinks as US Dollar Gains on Inflation Fears Boosting Yields. Where to for EUR/USD?

Daniel McCarthy, Strategist

Euro, EUR/USD, US Dollar, Crude Oil, Fed, Japan, JPY, China PMI - Talking Points

  • The Euro is struggling against a US Dollar buoyed by a lift in yields
  • EU leaders are moving toward severe restriction on Russian oil exports
  • With higher energy prices re-emerging, what will it mean for EUR/JPY?

The Euro lost ground in the Asian session despite yesterday’s high German inflation data setting the stage for the ECB to act on rates lift-off.

While the US observed Memorial Day on Monday, there has been plenty of action for the market to take in its stride.

At a summit in Brussels yesterday, European Union leaders agreed to impose further restrictions on Russian exports, most notably on their seaborne oil. Exceptions were made for pipeline supply until a solution can be found for those member states that rely heavily on it.

Crude oil made a 2-month high with the WTI futures contract over US$ 118 bbl and the Brent contract above US$ 123.

Federal Reserve Governor Christopher Waller once again opened the door for a more aggressive rate hike path for the Fed.

He was quoted as saying, "I am not taking 50 basis-point hikes off the table until I see inflation coming down closer to our 2% target."

This saw Treasury yields inch higher into the Asian morning, paring back earlier equity gains and lifting the US Dollar. The benchmark 10-year note is 10 basis-points higher so far this week, yielding near 2.84% at the time of going to print.

Then, Japanese data revealed a better-than-expected jobless rate of 2.5% instead of 2.6% anticipated but retail sales was flat at 0.8% for April.

The mood was then soured with a big miss in industrial production. It came in at -1.3% for the month of April instead of -0.2% anticipated. The Yen slipped on this news as well as the higher oil price taking its toll on the energy importing economy.

Chinese PMI data came after that and although the numbers were better than forecast, they still represented a contractionary outlook. Chinese manufacturing PMI for May printed at 49.6 against 49.0 anticipated and the non-manufacturing came in at 47.8 instead of 45.5 forecast.

At the same time as that release, the market got Australian building approvals that missed by a long way. It came in at -2.4% month-on-month in April instead of rising by 2.0% as expected.

There is a swathe of European data today with GDP, CPI and jobs numbers being released across the continent for various jurisdictions. Canada will also see GDP and the US will get the latest Conference Board consumer confidence read.

Looking ahead, US President Joe Biden to meet Federal Reserve Chair Jerome Powell in the oval office today.

The full economic calendar can be viewed here.

EUR/JPY Technical Analysis

EUR/JPY defied general Euro weakness with the Japanese Yen seeing more significant headwinds.

The cross rate broke the topside of a Pennant formation and is potentially set to test possible resistance at the recent high of 138.32.

On the downside, support could be at 21-, 55- and 100-day simple moving average (SMA) which all lie near an ascending trend line near 136.10.

EURJPY CHART

Chart created in TradingView

--- Written by Daniel McCarthy, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @DanMcCathyFX on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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