The EUR/USD pair has experienced a significant surge, nearing 1.0820, driven by surprising deflationary trends revealed in the United States Producer Price Index (PPI) data.

May’s monthly headline PPI contracted by 0.3%, surpassing expectations of a 0.1% contraction, following April’s 0.2% growth. The annualized headline PPI has also softened to 1.1% compared to the consensus of 1.5% and the previous release of 2.3%.

Contrary to the headline PPI, the monthly core PPI in the US maintained its expected pace at 0.2%. However, the annualized core PPI decelerated to 2.8% instead of the anticipated 2.9% and the previous figure of 3.1%.

The impact of declining oil prices is evident in these markedly soft PPI figures. Companies have passed on the decrease in gasoline prices to consumers, indicating that overall demand has not shown signs of slowing down.

With soft inflation, a easing labor market, and sluggish economic activities, the decelerated PPI further strengthens the case for the Federal Reserve (Fed) to reconsider interest rate hikes. This has led to significant selling pressure on the US Dollar Index (DXY), causing it to drop below the crucial support level of 103.00.

In the Eurozone, investors eagerly await the interest rate decision from the European Central Bank (ECB). ECB President Christine Lagarde is expected to increase interest rates by 25 basis points (bps) to 4% in order to enhance the effectiveness of its quantitative tools in the battle against inflation, which currently stands above 6%.

Economists at Danske Bank suggest that if the Fed pauses its rate hikes, there could be potential upside risks for the EUR/USD pair in the near term. However, they maintain a bearish outlook on the currency pair for the second half of CY2023.


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