EUR/USD turned positive Wednesday after striking a 2-month low as lower U.S. yields US2YT=RR helped drive dollar sales, and the recent down trend may now be in doubt due to inflation expectations.
Euro zone 5-year/5-year inflation linked swaps EUIL5YF5Y=RR have rallied since their March 20 nadir and now trade at the highest level since March 7.
Rising inflation expectations may indicate the ECB could lean more hawkish than expected.
A 25 bps hike is expected at the June 15 meeting but a 20% probability for a 50 bps hike is also being priced in by short-term rates markets.
Meanwhile U.S. inflation linked swaps USIL5YF5Y=RR have traded within the 2.40-2.70% range since November and show no indications a rally is coming.
CME's FedWatch tool indicates a near 65% probability the Fed will leave rates unchanged in June while only a 35% probability of a 25 hike is in place.
Minutes of the Fed's May 2-3 meeting may give additional color on Fed policy as discord on rates has emerged.
April and Q1 PCE risks loom later this week.
Downside surprises would tighten U.S.-German spreads US2DE2=RR and Fed and ECB paths diverge, potentially underpinning EUR/USD.
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