EUR/USD: Long at 1.0930 for 1.1130

 | May 15, 2017 06:44AM ET

EUR/USD: Fed will raise rates in June, but further hikes are under question
Macroeconomic overview: U.S. retail sales increased broadly in April while consumer prices rebounded, pointing to a pickup in economic growth and a gradual rise in inflation that could keep the Federal Reserve on track to raise interest rates next month.

The reports on Friday added to labor market data in suggesting the near stall in economic activity in the first quarter was an anomaly. But a moderation in year-on-year inflation led financial markets to dial down expectations of at least two more rate increases this year.

The Commerce Department said retail sales rose 0.4% last month after an upwardly revised 0.1% gain in March. Sales rose 4.5% in April on a year-on-year basis. The market had forecast overall retail sales increasing 0.6% last month.

The economy grew at a 0.7% annualized rate in the first quarter, held back by the weakest increase in consumer spending in more than seven years. The Atlanta Fed estimates GDP will rise at a 3.6% pace in the second quarter.

In a separate report on Friday, the Labor Department said its Consumer Price Index rose 0.2% after dropping 0.3% in March. The rise in prices suggested that March's decline, which was the first in 13 months, was an aberration. In the 12 months through April, the CPI increased 2.2%. While that was a slowdown from March's 2.4% increase, it still exceeded the 1.7% average annual increase over the past 10 years.

Financial markets are pricing in more than a 70% chance of a rate hike at the Fed's June 13-14 policy meeting. But the likelihood the U.S. central bank will raise rates twice before the end of the year fell after Friday's data. Prices of U.S. Treasuries rose and the USD weakened against a basket of currencies after the release of Friday's data.

The chief of the Federal Reserve Bank of Chicago said Friday that he would be "very surprised" if the U.S. central bank raises interest rates more than two more times this year, and that it could be just once more if the inflation outlook clouds. Evans, who has a vote on monetary policy this year, also said that it seems "likely" the Fed could begin to trim its USD 4.5 trillion balance sheet before the end of the year.

Philadelphia Fed President Patrick Harker, a voting member of the Fed's policy committee this year, said the Fed could adjust the pace at which it trims its balance sheet depending on how financial markets react. He added that the U.S. labor market is roughly "at full health" and repeated his support for two more interest-rate hikes this year.

Technical analysis: Friday’s close above 14-day exponential moving average is encouraging for long trades. The nearest bulls’ target is 1.1021 high on May 8. A close above 1.0977 (50% fibo of May 2016-January 2017 fall) will may signal stronger upside move, to at least 61.8% fibo of the above-mentioned move (1.1127).