EUR/USD continues slogging higher despite PCE data beat

• EUR/USD continues steadily climbing above 1.0700 despite more inflationary US GDP data. 
• Core Personal Expenditures Price Index for March beats estimates. 
• EUR/USD strengthens after the report despite data suggesting US Dollar strength.  

EUR/USD trades in the 1.0720s on Friday, little changed after the release of March core Personal Consumption Expenditures Price Index (PCE), the US Federal Reserve’s (Fed) preferred gauge of inflation. 

The pair actually trades slightly higher after core PCE data released by the US Bureau of Economic Analysis (BEA) shows a higher-than-expected reading of 2.8% YoY, when analysts had expected 2.6% from 2.8% previously. On Month Core PCE rose 0.3% in line with expectations and the same as previously. 

The data only marginally changes the probability of the Federal Reserve making an interest-rate cut in September from 59% on Friday morning prior to the event to 60% after. 

Other data in the PCE report showed headline Personal Consumption Expenditures Price Index rising to 2.7%, beating estimates of 2.6% and a prior reading of 2.5%. On month, the PCE rose 0.3% as expected and the same as previous. 

Personal Income rose 0.5% as forecast and Personal Spending 0.8%, beating estimates of 0.6% and the same as previous. 

EUR/USD recovers from post-GDP data decline

EUR/USD has recovered back up to the 1.0730s after declining sharply to a low of 1.0678 on Thursday following the release of US first-quarter GDP data. Although annualized GDP growth missed consensus expectations and fell below the previous quarter’s growth rate, the Personal Consumption Expenditures Prices component, which measures the change in prices of goods, came in way higher compared with previous quarter and supported the US Dollar (USD).  

The inflationary data meant that markets dialed back their expectation of when the Federal Reserve (Fed) will start cutting interest rates, with the chance of a rate cut by the July meeting falling from 50% on the previous day to 34% afterwards, according to analysts at Deutsche Bank. 

The expectation of interest rates staying higher for longer temporarily strengthened the Greenback – but weighed on EUR/USD – because higher interest rates attract more foreign capital inflows.

Technical Analysis: EUR/USD continues slowly correcting higher

EUR/USD continues correcting higher despite experiencing a pullback down below the 1.0700 level after the release of US GDP data on Thursday. 

It has broken out of the rectangular range it was trading in on the 4-hour chart after piercing above the rectangle’s ceiling at 1.0700. 

The Bear Flag price pattern which was unfolding between April 16-22 looks deformed by the persistent price action above 1.0700 and is less credible. 

EUR/USD 4-hour Chart

The establishment of a rising sequence of peaks and troughs on the 4-hour chart strengthens the argument that the short-term trend has turned bullish and therefore suggestive of more gains. 

If it continues marching higher, resistance from a previous lower high on April 11 gives an initial target at 1.0757. Then the 50-day and 200-day Simple Moving Averages (SMA) on the daily chart (not shown) are likely to resist at 1.0807.

On the other hand, a break below the 1.0601 April 16 low would revive the Bear Flag hypothesis. 

According to technical lore, the expected move down from a Bear Flag equals the length of the preceding “pole” or a Fibonacci ratio of the pole. 

The Fibonacci 0.618 ratio of the pole extrapolated lower gives a conservative target at 1.0503. The next concrete target is at 1.0448 – the October 2023 low. A fall of equal length to the pole would take EUR/USD to 1.0403.