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Don't count out inflation in determining EUR/USD direction



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Oct 30 (Reuters) -EUR/USD hit a 7-session high and neared the 200-DMA Wednesday as above estimate Q3 German and euro zone GDPs eased some concern of slower economic growth, but forex market attention may be shifting toward U.S. and euro zone inflation and its impact on ECB and Fed policy.

U.S. October ADP and Q3 GDP reports suggested employment and growth are in good shape.

Q3 core PCE came in at 2.2% versus estimates of 2.1%, which may leave some investors disappointed at the pace of progress toward sustainably meeting the Fed's target, judging by the rally in U.S. 5-year break even inflation USBEI5Y=RR -- a measure of expected inflation -- to its highest since April 18.

However, rising inflation may become a concern in the euro zone after German October CPI and HICP increased more than expected, which helped rally German 2-year yields DE2YT=RR to a two-week high and also tighten German-U.S. spreads US2DE2=RR.

With inflation possibly becoming an issue again investors may lean towards the Fed and ECB cutting less than expected or perhaps pausing easing cycles.

U.S. September core PCE, the Fed's favored pricing gauge is due Thursday. Above-estimate results could rally U.S. yields and the dollar if traders conclude that the Fed may have to think about fighting inflation again.

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(Christopher Romano is a Reuters market analyst. The views expressed are his own)

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