EUR/USD Edges Lower to Mid-1.1300s Ahead of US PCE Price Index
Introduction
The EUR/USD currency pair slipped modestly to the mid-1.1300s on Friday Asia trading, losing some of the momentum generated by Thursday’s bounce off the 1.1200 support zone. Investors are now bracing for the US Personal Consumption Expenditures (PCE) Price Index release, the Fed’s preferred inflation gauge, and positioning ahead of next week’s European Central Bank (ECB) policy meeting. In this comprehensive analysis, we unpack the technical backdrop, examine the fundamental drivers behind recent moves, and explore what traders should watch in the hours and days ahead to stay ahead in the world’s most liquid FX market.
Recent Price Action and Market Context
On Thursday, EUR/USD rebounded strongly from a one-and-a-half-week low around 1.1200, erasing nearly half of the losses suffered earlier in the week. However, the relief rally lost steam into Friday’s Asian session, with spot quotes drifting down about 0.15% to hover around 1.1330. The pair’s inability to hold above the 1.1350–1.1370 resistance zone reflects mixed market sentiment, as dollar dip-buyers step back in amid renewed safe-haven flows triggered by a US trade-tariff reinstatement .
Key cross-currency moves accompanying this EUR/USD slide include:
- EUR/GBP: Inched down to about 0.8400 after German retail sales data slightly beat expectations but left the pound supported by firm UK consumer numbers .
- EUR/JPY: Held a bullish bias above 163.00, buoyed by Japan’s ultra-loose monetary policy contrasted with ECB tightening hopes.
Technical Analysis: Momentum vs. Support
- Support Levels: 1.1330 (mid-1.1300s), 1.1300 (psychological), and 1.1250 (50-day moving average).
- Resistance Levels: 1.1365 (Thursday’s high), 1.1380 (200-hour MA), and 1.1400 (round figure).
Momentum oscillators such as the Relative Strength Index (RSI) have turned lower from overbought territory, signaling a loss of short-term upside steam. Nevertheless, the longer-term trend remains intact above the rising 20- and 50-day moving averages, suggesting that dips toward 1.1300–1.1280 could once again attract buyers. Chart patterns point to a neutral bias between 1.1300 and 1.1380, with a decisive break beyond either level required to trigger a larger directional move .
Fundamental Drivers: European Data and Trade Headlines
European fundamentals remain mixed: April German retail sales growth of 2.3% year-on-year slightly exceeded the 1.8% consensus, offering limited support to the euro amid broader eurozone disinflation pressures and tepid business surveys. Markets are digesting regional inflation data, including harmonized CPI readings due Friday morning, which could underscore the ECB’s dilemma between growth and price stability.
On the trade front, President Trump’s delay in imposing proposed 50% tariffs on EU imports until early July has been a modest tailwind for EUR/USD, reducing near-term downside risks. However, a US federal appeals court's decision to stay a separate trade-tariff injunction late Thursday rekindled safe-haven demand for the dollar, putting a cap on the euro’s gains .
US Personal Consumption Expenditures (PCE) Price Index: The Critical Catalyst
All eyes are now on Friday’s release of the US PCE Price Index, scheduled for 8:30 am ET (18:00 GMT). Investors expect headline PCE inflation to moderate slightly to 4.1% year-on-year (from 4.2%), with the core PCE gauge (excluding food and energy) seen steady at 3.6%.
- Why It Matters: The Federal Reserve cites the core PCE rate when assessing progress toward its 2% inflation target. A cooler-than-expected reading could accelerate Fed rate-cut bets for late 2025, weighing on the dollar and potentially lifting EUR/USD. Conversely, a hotter print would reinforce the Fed’s restrictive stance and bolster USD strength .
- Market Implications:
- Above Expectations: USD rally resumes; EUR/USD vulnerable to a drop below 1.1300.
- In Line / Below Expectations: Dollar dips; EUR/USD likely retests 1.1370–1.1400 resistance.
- Volatility Opportunity: Many traders will use options straddles around key strikes to hedge ahead of the release.
Federal Reserve Outlook and Dollar Dynamics
While the PCE report is the immediate focus, medium-term Fed expectations hinge on labor market data, upcoming Jackson Hole remarks, and U.S. debt ceiling negotiations. Despite persistent fiscal concerns, the Fed delivered a relatively dovish message at its May meeting, signaling potential rate cuts next year if growth and inflation slow sustainably.
- Safe-Haven Flows: Recent geopolitical tensions and the trade-tariff saga have periodically driven “risk-off” USD purchases.
- Yield Differentials: The gap between U.S. two-year yields and German two-year bunds remains a USD-supportive factor; however, narrowing spreads amid weaker US yields could soften the dollar.
European Central Bank (ECB) Preview
Attention quickly shifts to the ECB’s June monetary policy meeting next Thursday. Markets are split on whether the ECB will:
- Hold Rates at the current 4.00% deposit rate, awaiting clearer disinflation signals.
- Hike 25 Basis Points to 4.25% if eurozone inflation data surprises on the upside.
ECB President Christine Lagarde’s forward guidance will be crucial; any hawkish tilt could strengthen the euro, while a dovish approach—citing slower growth—would likely weigh on EUR/USD . Traders will also parse updated staff projections (the “dot-plot”) for insight into the ECB’s terminal rate outlook.
Trading Strategies and Risk Management
- PCE-Driven Straddle: Place at-the-money straddles on EUR/USD around 1.1330 with expiries through Friday to capture potential volatility.
- Dip-and-Rally Approach: Use dips toward 1.1300 as entry points for long EUR/USD positions, targeting 1.1370 and 1.1400 levels, with stop-loss orders below 1.1280.
- Breakout Play: Monitor a close above 1.1380 on a 4-hour chart—an attractive signal for momentum traders to join a bullish breakout.
- Cross-Asset Hedging: Pair EUR/USD exposures with short positions in USD/JPY to balance carry-trade risks and yield differentials.
Key risk controls include:
- Tight stop-loss placements just beyond critical technical levels (e.g., 1.1280 on the downside, 1.1420 on the upside).
- Position size limits to manage PCE-related surprises and ECB meeting outcomes.
- Regular review of US Treasury yields and German bunds, as yield spreads often presage currency moves.
Conclusion
EUR/USD’s retreat into the mid-1.1300s underscores the tug-of-war between dollar safe-haven demand and euro support from delayed EU tariffs and firm German retail data. With the US PCE Price Index release poised to set the tone for Fed rate-cut expectations, and the ECB meeting looming next week, traders face a packed calendar that could swing the pair decisively. By combining disciplined technical entries, event-driven option strategies, and vigilant risk management, market participants can navigate the volatility and position effectively for the weeks ahead.