The EUR/USD pair advanced sharply on Thursday and reached its highest level since April 2022 after data showed U.S. consumer inflation slowed down for a sixth consecutive month.
At the same time, the euro got a boost from hawkish comments from European Central Bank (ECB) Governing Council members, which signaled more rate hikes in 2023.
At the time of writing, the EUR/USD pair is trading at the 1.0850 area, 0.86% above its opening price. The pair reached a nine-month high of 1.0867 before easing.
The greenback faced severe selling pressure during the American session after data showed the U.S. Consumer Price Index rose by 6.5% in December, just as the markets expected, posting a 0.1% monthly decrease and decelerating from its previous reading of 7.1%.
Core inflation came in at 5.7% from November's 6% rate, matching the consensus, although core prices still posted a 0.3% monthly increase.
As the annual inflation rate eased for a sixth consecutive month from its June peak of 9.1%, expectations of a less aggressive Fed are mounting.
The WIRP tool suggests that investors practically discard a 50 bps hike in February as they are betting on 94.7% odds of a 25 bps increase.
Against this backdrop, U.S. Treasury yields and the dollar took a hit, with the DXY index falling to its lowest level since June at 102.07.
In contrast, ECB's Governing Council member Olli Rehn stated on Wednesday that rate increases will still be necessary throughout the next several meetings to restore price stability.
On the same line, ECB policymaker Pablo Hernandez de Cos suggested that rates must be raised at a consistent rate going forward to bring down inflation expectations.
From a technical perspective, the EUR/USD holds a short-term bullish bias according to the daily chart, as the pair is trading above its key moving averages while indicators are gaining momentum, with the RSI moving closer to overbought territory.
On the upside, the next resistance is seen at the 1.0900 area, where the 50% Fibonacci retracement of the 1.2266 - 0.9535 decline stands.
Beyond that level, April's monthly high of 1.0936 and the 1.0950 area are the next barriers. On the downside, short-term support levels are seen at 1.0800 and 1.0700, followed by the 20-day SMA around 1.0645.
