The EUR/USD pair lacks clear intraday direction and moves within a tight trading range around the 1.0860-1.0865 area, remaining near the weekly low during the Asian session on Friday.
Market participants have opted to stay on the sidelines ahead of crucial inflation figures from the Euro Zone and the United States (US) before making new directional bets.
The flash release of the EuroZone Harmonized Index of Consumer Prices (HICP) is scheduled for 09:00 GMT and is expected to show a deceleration to a 5.6% year-on-year (YoY) rate in June from the previous month’s 6.1%.
However, the Core CPI is projected to rise from 5.3% to 5.5%, reinforcing expectations for an interest rate hike at the upcoming European Central Bank (ECB) meeting on July 27.
Nevertheless, concerns about economic headwinds resulting from rapidly increasing borrowing costs act as a hindrance for the shared currency, limiting the upside potential of the EUR/USD pair.
Later in the early North American session, market participants will pay attention to the US Personal Consumption Expenditures (PCE) Price Index. The data will influence market expectations regarding the future rate-hike trajectory of the Federal Reserve, which, in turn, will drive demand for the US Dollar (USD) and determine the short-term direction of the EUR/USD pair.
Prior to the release of these key data points, the USD pauses momentarily following a two-day strong rally, reaching its highest level since June 13. This temporary pause is seen to provide some support to the EUR/USD pair, at least for now.
In the meantime, the US central bank has indicated that borrowing costs may still need to rise by as much as 50 basis points by the end of this year, a sentiment reaffirmed by Fed Chair Jerome Powell this week.
Additionally, upbeat US economic data on Thursday solidified expectations for a 25 basis point rate increase at the July 25-26 FOMC policy meeting. Consequently, elevated US Treasury bond yields remain favorable for the Greenback, acting as a tailwind and curbing any substantial upside for the EUR/USD pair.
Given the aforementioned fundamental backdrop, the balance seems to favor bearish traders, suggesting that the path of least resistance for spot prices is downward. However, recent price fluctuations over the past couple of weeks indicate trader indecision.
Therefore, it is wise to wait for confirmation of further selling below the previous week’s swing low, around the 1.0845 region, before considering an extension of the recent pullback from a six-week high, which reached levels slightly above the psychological 1.1000 mark last Thursday.
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