EUR/USD eyes cycle highs – will it breach 1.10?

The EUR/USD pair continues to strengthen as investors are increasingly exiting their US dollar positions, pushing the most traded pair in the world toward its cycle highs at the psychological level of 1.10.

EU inflation updates

Germany, the largest economy in the Eurozone, is scheduled to disclose preliminary CPI figures later today.

North Rhine-Westphalia, the most populous state in Germany, was the first to post inflation data on Thursday, and its CPI jumped 0.6% on the month and 6.8% annually in March.

This indicates a deceleration in the increase from the previous month’s rate of 0.8% and the annual rate of 8.5%. It provides hope that inflation in this crucial area may finally be moderating.

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Data on Spanish consumer prices, Italian producer prices, and Eurozone consumer confidence are planned for delivery on Thursday afternoon before the official Eurozone CPI release on Friday. In March, the flash estimate for the Eurozone is forecast to decline to 7.2% YoY, while the annualized Core HICP is anticipated to be somewhat higher at 5.7%.

During its March meeting, the ECB reinforced its data-dependent attitude and abandoned rate raise guidance. As a result, the central bank will study the March HICP readings in the eurozone’s major members, notably Germany, France, and Spain, to determine its policy move in May.

Moreover, Frank Elderson, a member of the Executive Board of the European Central Bank (ECB) and Vice-Chair of the central bank’s Supervisory Board, stated in an interview with the media on Thursday that “we must lower the extremely high rate of inflation.”

Fed expected to stop rate hikes

In the US, final Q4 GDP numbers are due on the calendar today, followed by Initial Jobless Claims and a speech by Richmond Fed T. Barkin.

According to the CME FedWatch tool, the markets are pricing in a 60% likelihood that the Fed will leave interest rates unchanged at its next meeting. At the same time, investors anticipate 1% of rate cuts by the end of the year. Friday’s personal consumption expenditures (PCE) update will give more insight into inflationary pressures.

As a result of the recent worsening in the US GDP outlook and less favorable tightening mix for the Dollar, analysts at Goldman Sachs have increased their 3- and 6-month EUR/USD predictions to 1.05 (from 1.02).

“And, we are maintaining our 12-month forecast at 1.10; we expect that still-limited economic slack and rising recession risks cut against more meaningful Dollar downside,” they added.

It looks like the key support for the near term is near previous highs at 1.0740/50, and as long as the euro trades above it, the short-term outlook seems bullish, targeting the mentioned 1.10 threshold. On the other hand, on a break below 1.0740/50, we could see selling toward the 1.0520 zone.