EUR/USD rallied above the 10- and 21-day moving averages on Wednesday, hitting a five-session high on signs that investors might be positioning for diverging inflation trends between the U.S. and euro zone.
The U.S. market interest rates fell again, further indication that investors agree with the Fed's diagnosis that inflation increases are transitory.
The 10-year yield US10YT=RR fell to a 22-session low, nearing May's 1.469% low.
December 2022 eurodollar EDZ2 rallied to a 3-1/2 month high, threatening resistance near 99.67.
Meanwhile, U.S. 5-year/5-year inflation linked swaps USIL5YF5Y=R fell to a 10-session low, approaching May's low.
Expectations for the ECB's upcoming inflation projections could be buoying the euro.
Euro zone May HICP came in above the ECB's target of below but close to 2% nL2N2NJ0OP, leaving investors bracing for higher ECB inflation outlooks, which could lead the ECB to taper PEPP buying sooner than expected.
Diverging U.S. and euro zone inflation, if realized, would increase the probability of EUR/USD resuming its rally off the March low and the possibility of testing its 2018 high.
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