EUR/USD surges to 7-month high, as soft inflation data sinks the dollar

EUR/USD rose sharply on Friday extending a five-day winning session, as stronger than expected GDP figures in the euro zone were met with soft consumer spending data in the U.S., sending the euro soaring to seven-month highs against the dollar.

The currency pair traded in a broad range between 1.1349 and 1.1459, before settling at 1.1454, up 0.0102 or 0.90% on the session. With the considerable gains, the euro reached its highest level against the dollar since October 15. The euro ended April up by roughly 0.65% against its American counterpart.

EUR/USD likely gained support at 1.0538, the low from December 3 and was met with resistance at 1.1625, the high from Aug. 25.

The dollar moved lower in overnight trading after the People’s Bank of China (PBOC) jolted foreign exchange markets by fixing the yuan 0.56% higher against the dollar, its strongest one-day move since 2005 when it decoupled with the dollar. The move came in the wake of two closely-watched central bank meetings earlier this week when the Federal Reserve and the Bank of Japan both stood pat by leaving their benchmark interest rates unchanged.

In European morning trading, Eurostat announced that GDP in the euro zone during the first quarter rose by 1.6%, above consensus forecasts of 1.4%. It came as unemployment throughout the zone fell by 0.2 to 10.2%, below analysts’ expectations of 10.2%. In April, inflation in the euro area fell by 0.2%, slightly below consensus estimates of a 0.1% decline, one month after March’s flat reading.

The greenback extended its slide following the release of soft economic data in the U.S. On Friday morning, the Commerce Department said its Personal Consumption Expenditures (PCE) Price Index in March rose by 0.8% on an annual basis, down slightly from February’s annual gains of 1.0%. The Core PCE Index, meanwhile, increased by 1.6%, also lower compared with the previous month’s level of 1.7%. Core PCE inflation, which strips out volatile food and energy prices, is the Fed’s preferred gauge for inflation. The dollar then hit session-lows after the University of Michigan said consumer sentiment in April fell 0.7 to 89.0, dropping to a seven-month low. Analysts expected to see gains of 0.7 to 90.4.

While core inflation surged to its highest annual level since 2012 in January, it has still remained below the Fed’s 2% objective for every month over the last three years. Hawkish members of the Fed have sent some indications they could support an interest rate hike in June if they receive signals that inflation is firming over the next two months. Any rate hikes by the Fed this year are viewed as bearish for gold, which struggles to compete with high-yield bearing assets in rising rate environments.

Dallas Fed president Rob Kaplan said on Friday that he could support further monetary policy in June or July if the U.S. economy shows signs of improvement during the second quarter. Addressing reporters on the sidelines of an OMFIF event in London, Kaplan noted that the UK’s referendum on a departure from the European Union could impact the timing of the Fed’s next rate hike. A potential Brexit could create a “sudden depreciation,” in the pound, Kaplan said, creating a ripple effect throughout the global economy.

The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, fell more than 0.60% to an intraday low of 92.98, its lowest level since last July. The index, which settled at 93.03, is down 7% since the start of December.