Euro (EUR) Update – German Inflation Turns Lower, EUR/USD Back Below 1.0700

EUR/USD Prices, Charts, and Analysis

• German inflation moves sharply lower in May.
• ECB Financial Stability Review warns of a ‘fragile economic outlook.’

German inflation fell by more than expected in May, easing the pressure on the ECB to continue hiking interest rates. German inflation came in at 6.1%, below expectations of 6.5% and over one point lower than April’s reading of 7.2%. Earlier in the session French inflation also came in lower than forecast at 5.1% vs. expectations of 5.5% and a previous reading of 5.9%. Italian inflation missed forecasts but was 0.6% lower than last month.

The latest ECB Financial Stability Review highlights that Euro Area financial markets ‘remain vulnerable to less favorable growth and inflation outcomes’ and that tighter financial and credit conditions are ‘testing the resilience of Euro Area firms, households, and sovereigns’. The report also warned of the risk of a property price correction, that sovereign funding costs are set to increase, and that recession fears ‘may return.’

ECB Financial Stability Review, May 2023

According to the latest media reports, the US debt ceiling is likely to be passed today. According to a report on CNBC, House Financial Services Committee Chairman, Patrick McHenry, the deal has enough votes to pass through both the House and the Senate. US Treasury yields continue to ease slightly but the latest CME rate probabilities suggest another 25 basis point rate hike will be announced at the next FOMC meeting and that rates will stay at this level for the following two meetings.

Debt Ceiling Blues, Part 79. What Happens if the US Defaults?

CME Fed Fund Rate Probabilities – May 31, 2023

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EUR/USD remains under pressure from a strong US dollar and a marginally weaker Euro. The pair have made another 10-week low and with little in the way of solid support seen on the daily chart, EUR/USD may slip all the way down to the 105.00/105.16 level before buyers return.

EUR/USD Daily Price Chart – May 31, 2023

Chart via TradingView

Retail Trading Sentiment is Mixed

Retail trader data shows 61.43% of traders are net-long with the ratio of traders long to short at 1.59 to 1.The number of traders net-long is 5.59% lower than yesterday and 2.14% lower from last week, while the number of traders net-short is 4.66% higher than yesterday and 7.96% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/USD prices may continue to fall. Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/USD trading bias.

What is your view on the EURO – bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author via Twitter @nickcawley1.