EUR/USD continues to consolidate its fall from the March 31 daily high, which is a bearish signal, but shorts face squeeze risks if the Fed is not as hawkish as investors have priced in.
Getting hot running inflation under control has been the Fed's mantra in 2022, which has rallied U.S. treasury yields US10YT=RR, but there may be signs inflation has peaked.
April ISM manufacturing came in below estimates and the prices paid component dropped to 84.6 from 87.1 in March.
A sharp drop in investors' inflation expectations reinforces views inflation may have peaked.
The 5-year/5-year inflation linked swap USIL5YF5Y=R fell sharply from the April 28 high at 2.860% and currently trades at 2.67%.
Rates markets may be reinforcing the view inflation has peaked.
June 2023 Eurodollars EDM3 fell sharply from the April 27 high but, after hitting a 7-session low today, the slide stalled short of the April 22 low and the future then rallied into positive territory.
The move may indicate investors are reluctant to price in a higher Fed terminal rate.
Should the Fed not be as hawkish as investors expect EUR/USD's consolidation phase may fail and a short squeeze could take hold.
A test of 1.0850/1.0900 resistance is then probable.
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