Forex Market: EUR/USD pauses rally as US yields support dollar, Euro Area inflation data now eyed

Having gained 0.9% on Wednesday after a surprise inflation acceleration in Germany mounted more pressure on the European Central Bank to raise interest rates, EUR/USD weakened on Thursday, as the greenback drew support from a surge in US Treasury yields.

Investors are now expecting the preliminary CPI inflation data for the Euro Area as a whole, due out at 10:00 GMT today.

“Expectation is for a slower rise … down from last print of 8.6%, but this is in contrary to France and Spain CPIs which have recently re-accelerated,” OCBC Bank strategist Christopher Wong was quoted as saying by Reuters.

“An upside surprise could lend some strength to the euro.”

Germany’s EU-harmonised CPI inflation accelerated to 9.3% in February, preliminary data showed on Wednesday, from 9.2% in January, while exceeding the median analyst estimate of a 9.0% rise.

Month-over-month, German consumer prices rose 1.0% in February, also outstripping market expectations of a 0.7% increase.

Despite relief measures, energy prices went up 19.1% year-on-year in February, while food prices soared 21.8% year-on-year, the federal statistics office said.

Inflation in two other key Euro zone economies unexpectedly accelerated in February, data showed earlier this week. France’s annual CPI inflation surged to 7.2% from 7.0% a month ago and above market consensus of 7.0%, while Spain’s annual inflation rose to 6.1% from 5.9% a month ago and above expectations of 5.5%.

The European Central Bank is expected to raise its benchmark rate by 50 basis points later in March, though some policy makers have called for caution, as the economy is beginning to respond to past rate hikes.

Besides the inflation data print, Euro Area’s employment figures, the ECB Monetary Policy Meeting Accounts as well as the US jobless claims data will also be on investors’ radar today.

As of 9:07 GMT on Thursday EUR/USD was edging down 0.28% to trade at 1.0636. Yesterday the major Forex pair registered its sharpest advance since February 1st, climbing as high as 1.0691. The latter has been the pair’s strongest level since February 21st (1.0698).

The US Dollar Index firmed 0.39% to 104.777 as US bond yields hit fresh highs and after Minneapolis Fed President Neel Kashkari left the door open to a 50 basis point hike at the bank’s upcoming policy meeting this month.

10-year US Treasury yields registered a fresh 4-month high of 4.028% earlier on Thursday, while 2-year bond yields hit a fresh 15-year high of 4.9310%.