EUR/USD under pressure & vulnerable ahead of CPI dataChart supports near 1.0667, 1.0550 & 1.0502 in crosshairsBut CPI uplift for ECB rate expectations could stem losses

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The Euro to Dollar exchange rate entered a holiday-shortened week under pressure near two-month lows and with key technical support levels in its sights but could get an opportunity to recover some lost ground if Thursday's inflation figures are anything like those released in the UK last week.

Europe's single currency fell close to its lowest levels against the Dollar since late March in thin public holiday trade on Monday, leading some observers to contemplate further losses potentially taking it back toward 1.06 or below in certain circumstances later this week.

"After an extended run lower through May, valuation looks a little more attractive and a strong consensus seems to be developing among ECB policymakers that the central bank can deploy two more hikes at least," writes Shaun Osborne, chief FX strategist at Scotiabank, in a Monday remarks.

"The EUR is, however, clearly flirting with more softness; retracement support at 1.0726 is (barely) holding on a daily close basis and a clear break under here will target additional EUR losses towards the 1.05 area. Above 1.0760 should bring minor relief from selling pressure," Osborne adds.

Monday's fall came hard on the heels of official data out in the U.S. last Friday suggesting the preferred inflation measure of the Federal Reserve (Fed) rose in April when expectations were that it would remain unchanged.

Above: Euro to Dollar rate shown at daily intervals with Fibonacci retracements of March rally indicating possible areas of technical support and shown alongside spread or gap between 02-year German and U.S. government bond yields. Click image for closer inspection.

The data keeps alive the risk of a further increase in U.S. interest rates being announced later this year and has made interest rate cuts a less likely prospect for the foreseeable future, hence Friday's losses for the Euro to Dollar rate.

But the single currency could benefit if inflation data out in Europe over the course of Tuesday, Wednesday and Thursday comes in even remotely similar to that released in UK last week where domestically-generated inflation accelerated notably when it had been expected to fall.

"We think the risk lies towards a stronger CPI given the strength in the UK’score CPI," writes Joseph Capurso, head of international economics at Commonwealth Bank of Australia, in a Monday research briefing.

"The stronger than expected UK CPI caused the GBP/USD to fall as it raised concerns that much more interest rate tightening could push the UK into a recession. A similar reaction could see EUR/USD fall towards 1.0499 (61.8% Fibbo)," Capurso and colleagues add.

The economist consensus is for inflation to fall from 7% to 6.3% for April on Thursday and that core inflation should fall from 5.6% to 5.5% but the UK and U.S. figures suggest that risk is squarely on the upside.

Above: Euro to Dollar rate shown at daily intervals with Fibonacci retracements of 2022 rally indicating possible areas of technical support and shown alongside spread or gap between 02-year German and U.S. government bond yields. Click image for closer inspection.

Market-implied expectations indicate investors already expect the European Central Bank (ECB) to raise its interest rate on at least two more occasions this year, taking the once-negative deposit rate up to 3.75%, but the implied expectation could rise if the reaction to last week's UK data is anything to go by.

"Our future decisions will ensure that the policy rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to our two per cent medium-term target and will be kept at those levels for as long as necessary," European Central Bank (ECB) chief economist Philip Lane said on Friday.

"In particular, our policy rate decisions will continue to be based on our assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission," he added in a reminder of the ECB's policy position from the May meeting.

Financial markets priced in an additional three increases for the Bank of England (BoE) Bank Rate following last week's data and while this led to losses for Pound Sterling, the positive correlation between EUR/USD and bond yields suggests that the Euro might benefit from any such outcome.

However, on the other side of the same coin, appetite for the single currency could be further undermined if inflation is in-line with expectations or lower

Source: European Central Bank.

The inflation numbers are the highlight of the calendar in Europe but the single currency is also likely to be susceptible to the twists and turns of the Dollar and developments in the U.S. government bond market during what is also a busy period for U.S. economic data.

Friday's non-farm payrolls report is the highlight of the U.S. calendar but Wednesday's Job Openings and Labour Force Turnover Survey (JOLTS) and Thursday's Institute for Supply Management (ISM) Manufacturing PMI survey could also impact the Dollar and bond markets.

In addition, the bond market response to the weekend agreement between the White House and Republican Party's Congressional leadership to raise the U.S. government debt ceiling may also be an important influence on the Dollar and Euro once North American markets reopen on Tuesday.

"Hawkish Fed speak, better than expected US growth and slowing growth momentum elsewhere in Germany and China may still support USD momentum in the interim. But our bias remains to sell rallies," says Christopher Wong, an FX strategist at OCBC Bank.

"The Fed nearing the end of its tightening cycle typically implies limited room for USD upside. Moreover, dovish expectations have been entirely unwound and we still do not expect Fed to hike that once more but to remain status quo for most of the remainder of the year," Wong adds.

Above: Quantitative model estimates of ranges for selected pairs this week. Source Pound Sterling Live. Click the image for a more detailed inspection.