EUR/USD Forecast: Euro attracts bulls after clearing key resistance level
- EUR/USD trades above 1.1700 in the European session on Wednesday.
- The US Dollar struggles to find demand after July inflation data.
- The pair's near-term technical outlook points to a bullish bias.
Following Monday's decline, EUR/USD reversed its direction and registered strong gains on Tuesday. The pair preserves its bullish momentum and trades in positive territory above 1.1700 in the European session on Wednesday.
Euro PRICE This week
The table below shows the percentage change of Euro (EUR) against listed major currencies this week. Euro was the strongest against the Canadian Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | -0.60% | -0.83% | -0.24% | 0.06% | -0.42% | -0.44% | -0.71% | |
| EUR | 0.60% | -0.23% | 0.38% | 0.68% | 0.18% | 0.13% | -0.10% | |
| GBP | 0.83% | 0.23% | 0.58% | 0.91% | 0.41% | 0.36% | 0.13% | |
| JPY | 0.24% | -0.38% | -0.58% | 0.32% | -0.15% | -0.14% | -0.33% | |
| CAD | -0.06% | -0.68% | -0.91% | -0.32% | -0.47% | -0.55% | -0.79% | |
| AUD | 0.42% | -0.18% | -0.41% | 0.15% | 0.47% | -0.06% | -0.31% | |
| NZD | 0.44% | -0.13% | -0.36% | 0.14% | 0.55% | 0.06% | -0.22% | |
| CHF | 0.71% | 0.10% | -0.13% | 0.33% | 0.79% | 0.31% | 0.22% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent EUR (base)/USD (quote).
The US Dollar (USD) came under renewed selling pressure in the American session on Tuesday as July inflation data fed into expectations of a dovish Federal Reserve (Fed) policy outlook in the last quarter of the year.
The US Bureau of Labor Statistics announced that the annual inflation, as measured by the change in the Consumer Price Index (CPI), held steady at 2.7% in July. This reading came in below analysts' estimate of 2.8%. On a monthly basis, the CPI and the core CPI increased by 0.2% and 0.3%, respectively, to match market expectations.
According to the CME FedWatch Tool, the probability of the Fed lowering the policy rate three times this year rose to 53% from about 43% before the inflation report was released.
Meanwhile, Wall Street's main indexed registered strong gains after the opening bell on Tuesday, putting additional weight on the USD's shoulder.
Early Wednesday, US stock index futures rise about 0.2% on the day. In the absence of high-impact data releases, the risk perception could impact EUR/USD's action. The pair could continue to push higher in case risk flows continue to dominate the action in financial markets.
EUR/USD Technical Analysis
The Relative Strength Index (RSI) indicator on the 4-hour chart rose above 60 and EUR/USD cleared the 200-period Simple Moving Average (SMA), highlighting a buildup of bullish momentum.
On the upside, 1.1760 (static level) aligns as the next resistance level before 1.1800 (static level, round level) and 1.1830 (July 1 high). Looking south, support levels could be spotted at 1.1660-1.1650 (200-period SMA, Fibonacci 23.6% retracement of the latest uptrend), 1.1620 (100-period SMA, 50-period SMA) and 1.1540 (Fibonacci 38.2% retracement).
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
Author
Eren Sengezer
FXStreet
As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.
