EUR/USD ahead of Euro area inflation release

ECB dovish stance

Recently, the ECB adopted more of a dovish stance.

ECB President Christine Lagarde noted that the eurozone’s economy is in a disinflationary process and added that inflation is ‘making good progress’. Lagarde added that they are confident but ‘not sufficiently confident’ and commented that additional data is needed; more will be known in June.

In addition to this, in recent newspaper interviews, we saw ECB's Yannis Stournaras and Robert Holzmann stress the point that the ECB could potentially cut rates by 100bps and be the first to cut ahead of the Fed. This is weighing on the EUR/USD currency pair.

For the ECB, markets are fully pricing in the first 25bp cut in June, with a total of nearly four rate cuts on the table (-92bps) for the year. As of writing, it is doubtful the central bank will cut rates at this month’s policy meeting on 11 April, but a dovish hold is certainly a real possibility, which, by extension, underlines a strong likelihood that the ECB may pull the trigger at June’s meeting.

Euro area inflation ahead

Given the clearer trajectory for euro area disinflation, tomorrow’s CPI inflation print for March will be one to monitor. You may recall that YoY headline inflation slowed to 2.6% in February from 2.8%, weighed down by cooling food, manufactured goods, and energy prices. Expectations heading into tomorrow’s release show both headline and core readings (YoY) down to 2.5% (from 2.6%) and 3.0% (from 3.1%), respectively.

Daily support in view at $1.0739

Technically, this remains a bearish pair. Longer-term studies have maintained a downside bias since 2008. The pullback off September 2022 lows at $0.9536, therefore, could be viewed as a sell-on-rally scenario. The bearish vibe is emphasised on the daily chart in the shape of a possible head and shoulders top formation, though the neckline is taken from the low of $1.0724 and is directed to the downside, which can limit risk-reward for any sellers basing a technical short on this pattern. You may also note that the pair is currently testing support on the daily chart from $1.0739 and will be a key level to keep an eye on heading into tomorrow’s risk event.

Given the ECB's dovish tone, any meaningful deviation to the downside will likely see the euro pulled lower against the majority of its G10 peers. Any upside surprise could underpin the euro but is likely to be short-lived.