The euro struggled to sustain its gains against a strong US dollar on Tuesday’s early New York session. Despite the positive economic releases from the Eurozone, the EUR/USD pair failed to maintain its upward momentum. The robust US Q1 Labour Cost Index data which showed strong wage growth and potential inflationary pressures in the United States didn’t help to support the pair either.
Eurozone posts high inflation and strong Q1 GDP growth
The Eurozone experienced high inflation and a firm Q1 GDP growth which initially provided support for the euro. As Eurostat reported, preliminary April inflation data and a first quarter GDP beat prior estimates. Eurozone’s headline inflation increased in line with expectations and the prior reading of 2.4%. The annual core inflation, excluding volatile food and energy prices, rose at a higher pace of 2.7% than the 2.6% that was forecast but was lower than the prior reading of 2.9%.
Monthly headline and core inflation increased by 0.6% and 0.7%, respectively. The Eurozone economy grew at a strong rate of 0.3% in Q1, which was higher than the expected 0.1% and 2023’s last quarter’s stagnant performance. Annually, the Q1 GDP growth rate came in double than the 0.2% that was expected.
However, the fact that the euro has not gained traction despite the positive economic data suggests that investors are still worried about the potential rate cut decision by the ECB. While Eurostat reported rising inflation in April and impressive Q1 GDP growth, Eurozone’s annual core inflation decreased, suggesting a possibility of complications in the future. Additionally, while the monthly headline and core inflation figures are growing, the outlook for the Eurozone economy remains bleak, especially in light of the expectations of ECB rate cuts.
The ECB is still debating whether to implement a rate cut in June, with most members supporting this move. This bearish psychology and the anticipation of a prolonged rate-cutting cycle this year may continue to weigh on the euro.
Fed to maintain interest rates unchanged
On the other hand, the US dollar edged up after robust Q1 Employment Cost Index and ahead of the Federal Reserve’s monetary policy decision scheduled for Wednesday. The Dollar Index (DXY) jumped higher and remained within a two-week trading zone on expectations of a hawkish Fed. According to the United States Bureau of Labour Statistics (BLS), the leading wage growth indicator grew at a strong pace of 1.2% which came in higher than the estimates of 1.0% and the previous reading of 0.9%. This has increased worries about US stubborn inflation. The strong wage growth tends to boost household spending and helps increase price pressures.
On Wednesday, when the Fed will meet for its monetary policy decision, markets expect the US central bank to hold rates steady in the range of 5.25%-5.50%. Investors will strongly focus on the interest rate guidance. With inflation measures for March highlighting persistently high price pressures due to robust consumer spending and tight labour market conditions, the Fed is anticipated to support keeping interest rates higher for a longer period. Fed policymakers are estimated to continue with their current monetary policy framework until they get satisfactory evidence that inflation will sustainably return to the desired rate of 2% target.
Market participants will also pay close attention to the ADP Employment Change and the ISM Manufacturing PMI for April.