EUR/USD: Decisive news for traders today

The EUR/USD remained under pressure, easing its pullback below its 20-day moving average (dark blue line), following US inflation figures that rattled bond markets, and ahead of the 2:15 pm (EU time) conclusion of the ECB Governing Council meeting, inevitably impacted by the geopolitical situation in the Middle East.

Investors learned of an acceleration in US consumer prices last month. Inflation jumped to 4.1% year-on-year in May, reaching its highest level in three years.

"At first glance, it's obviously the 'energy' component that explains the rise in inflation. Energy prices are up 24% year-on-year, something that hasn't happened since Russia's invasion of Ukraine," notes Bastien Drut, Head of Strategy & Analysis at CPRAM.

"Even if core inflation is slightly less robust than anticipated, the fact that overall inflation is above 4% puts direct pressure on the Fed. For the moment, the rise in inflation is confined to the energy sector, but the longer the conflict in Iran lasts, the more the price increases will spread to a large number of sectors," he adds.

"The slowdown in core inflation is an encouraging signal for investors, suggesting that the Federal Reserve may have less need to raise interest rates if inflationary pressures remain more contained than anticipated," adds Josh Jamner, Senior Investment Strategy Analyst at ClearBridge Investments. "However, persistent uncertainties surrounding the prospects for a lasting peace agreement and the reopening of the Strait of Hormuz are likely to continue overshadowing today's positive inflation news, given the renewed tensions observed over the past 72 hours."

In terms of core inflation (excluding changes in energy and food costs), inflation remained relatively moderate at 3% year-on-year for May.

The ECB is also under pressure... especially since the economic powers of the Eurozone are far more dependent on fossil fuel imports than the United States.

The CIO Office of Indosuez Wealth Management anticipates "two temporary rate hikes by the ECB this year, in June and July."

"The main driver of our scenario is the continued rise in inflation expectations, with household expectations reaching 4%, a level similar to market measures such as one-year inflation swaps. In our view, the ECB is increasingly concerned about the risk of inflation expectations becoming anchored, especially as surveys continue to show a rise in intentions to increase selling prices. At the same time, we see no convincing evidence of significant second-round effects: the labor market does not appear tight enough to generate a sustained wage-price spiral, with recent surveys in the services sector pointing to weaker hiring intentions, while corporate margins remain under pressure."

The answer and verdict will be revealed today at 2:15 p.m (EU time). for the interest rates themselves and, more importantly, at 2:45 p.m. for the traditional press conference, the highlights of which will be discussed live. The press conference, which generally lasts an hour, consists of a speech and a question-and-answer session.

The ECB "must now manage a new supply shock, this time again stemming from the energy sector," notes Antoine Fraysse-Soulier, market analyst for eToro. "The difficulty lies precisely there. A central bank cannot reopen the Strait of Hormuz, nor can it directly lower the price of oil or gas. However, it can prevent this increase in costs from spreading throughout the entire economy. It is this risk of a second round of shocks that worries monetary policymakers."

"The real issue will therefore be less the decision itself than Christine Lagarde's message. Markets will be looking to see if the ECB is preparing another rate hike as early as September or if it wants to maintain maximum flexibility. The new economic projections will be crucial. Upwardly revised inflation and lowered growth would confirm the classic dilemma of a central bank facing an energy shock: how to fight inflation without stifling an already fragile economy."

To watch also: US producer prices at 2:30 PM.

Right now, the EUR/USD is trading at $1.1532.

KEY TECHNICAL ELEMENTS
The intermediate support level at $1.160, which acted as a safeguard, was broken on Friday amid very high volatility, lending credence to our bearish scenario towards $1.1202.