Euro Fatiguing Heading Into an Inflation Filled Week

EUR/USD ANALYSIS & TALKING POINTS

  • Euro strength looks to be fading as we enter yet another week with more questions than answers.
  • US CPI the focus for the week. Will inflation support stellar NFP?
  • Daily chart could be on the precipice of a rising wedge breakout.

EURO FUNDAMENTAL FORECAST: BEARISH

The euro is up almost 3% against the US dollar year-to-date with a strong push from a hawkish European Central Bank (ECB) and comparatively less aggressive Fed. Things changed last Friday when the US Non-Farm Payroll (NFP) report once again reinforced the tight labor market in the US alongside elevated earnings figures. Possible pivot talk from market participants have been suppressed giving the upcoming inflation data (see economic calendar below) that much more emphasis.

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German inflation will kick off the week being the eurozone’s barometer as the largest European economy. Expectations are forecasted to come in slightly lower than the March print. The focal point will surely be on the US and whether or not inflationary pressure remain. Such a situation would drive USD support and possibly create further fears around the ongoing banking crisis. Recessionary fears and slower global economic growth would ensue and possibly play into the safe haven appeal of the greenback. In summary the US CPI report will dominate the week’s proceedings with PPI and Michigan consumer sentiment rounding off the EUR/USD trading week.

EUR/USD ECONOMIC CALENDAR

Looking at money market pricing for the ECB below, markets have revised their predictions downward from almost 70bps by year end to 33bps at present. I think this reflects the uncertain global economic conditions as well as a wavering euro that could be ending it’s upside rally.

ECB INTEREST RATE PROBABILITIES

TECHNICAL ANALYSIS

Daily EUR/USD price action shows the pair trading within a rising wedge chart pattern (black), now testing the wedge support and trading below the 1.1000 psychological handle. Bullish momentum has been fading of recent indicated by the declining reading on the Relative Strength Index (RSI) despite higher highs on EUR/USD. This is known as bearish/negative divergence and often points to impending downside. This outlook will be invalidated should prices break and close above wedge resistance coinciding with the 1.1096 swing high.

Resistance levels:

  • 1.1185
  • 1.1096/Wedge resistance
  • 1.1000

Support levels:

  • Wedge support
  • 1.0900

IG CLIENT SENTIMENT DATA: MIXED

IGCS shows retail traders are currently SHORT on EUR/USD, with 57% of traders currently holding short positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment but due to recent changes in long and short positioning, we arrive at a short-term cautious disposition.

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