As the US dollar continued its persistent slump on Thursday despite enduring expectations of higher US inflation and interest rates, the EUR/USD rose to revisit major resistance around the 1.2500 handle, which is the area of recent 3-year highs. US government bond yields remained elevated near new multi-year highs in the aftermath of Wednesday’s US Consumer Price Index that was significantly higher than expected for both the headline and core inflation data and Thursday’s US Producer Price Index that was significantly higher than expected for the core data. Despite rising bond yields and increasingly hawkish Fed anticipation, the dollar has been unable to shake its virtually unrelenting bearish sentiment, as the US dollar index currently wallows near 3-year lows.
Combined with a resilient euro that has remained well-supported on a rising eurozone economy and keen anticipation of monetary policy tightening by the European Central Bank, the heavily weakened US dollar has helped boost EUR/USD back up to the noted 1.2500-area resistance, slightly above which a new long-term high was reached late last month.
The week ahead will be important particularly for the euro, as key services and manufacturing data from Germany, France and the eurozone as a whole, will be released on Wednesday. More importantly, central bank meeting minutes will be released from the US Federal Reserve and European Central Bank on Wednesday and Thursday, respectively. The relative policy stances between the Fed and ECB in their last meetings, as shown in the minutes, will likely make a significant impact on EUR/USD.
As noted, the 1.2500 price area is currently the key level to watch as markets determine whether the heavily oversold US dollar will finally be supported or if it has more to lose in the short-term. If a bottom for the dollar is indeed established, any EUR/USD turn down from around 1.2500 resistance could presage another pullback targeting 1.2200-area support once again.