EUR/USD Forecast: Euro struggles to gather bullish momentum, eyes on inflation data
- EUR/USD holds steady above 1.0800 in the European session on Friday.
- Inflation data from the Eurozone and the US could ramp up the pair's volatility.
- The near-term technical outlook points to a lack of buyer interest.
Following Wednesday's sharp decline, EUR/USD staged a rebound and closed in positive territory on Thursday. The pair fluctuates above 1.0800 in the European session as investors move to the sidelines ahead of key inflation data.
The US Bureau of Economic Analysis (BEA) revised the annualized first-quarter Gross Domestic Product (GDP) growth lower to 1.3% from 1.6% in the initial estimate. In turn, the benchmark 10-year US Treasury bond yield corrected lower and lost more than 1% on Thursday, making it difficult for the US Dollar (USD) to preserve its strength.
Euro PRICE This week
The table below shows the percentage change of Euro (EUR) against listed major currencies this week. Euro was the weakest against the Swiss Franc.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.23% | 0.26% | 0.08% | 0.00% | -0.06% | -0.06% | -1.05% | |
| EUR | -0.23% | 0.00% | -0.14% | -0.23% | -0.36% | -0.39% | -1.25% | |
| GBP | -0.26% | -0.00% | -0.18% | -0.26% | -0.36% | -0.32% | -1.28% | |
| JPY | -0.08% | 0.14% | 0.18% | -0.11% | -0.16% | -0.05% | -1.16% | |
| CAD | -0.01% | 0.23% | 0.26% | 0.11% | -0.09% | -0.08% | -1.11% | |
| AUD | 0.06% | 0.36% | 0.36% | 0.16% | 0.09% | 0.05% | -0.93% | |
| NZD | 0.06% | 0.39% | 0.32% | 0.05% | 0.08% | -0.05% | -1.00% | |
| CHF | 1.05% | 1.25% | 1.28% | 1.16% | 1.11% | 0.93% | 1.00% |
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).
Eurostat will publish the preliminary Harmonized Index of Consumer Price (HICP) data for May on Friday. Investors expect the core HICP to rise 2.8% on a yearly basis. A reading below the market expectation could weigh on the Euro with the immediate reaction.
In the second half of the day, the BEA will release the Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve's (Fed) preferred gauge of inflation, for April. Market participants will pay close attention to the monthly core PCE Price Index, which is forecast to rise 0.3% to match March's increase. A reading of 0.2% or lower could revive expectations for a Fed rate cut in September and trigger a USD selloff heading into the weekend. On the other hand, EUR/USD could stay on the back foot if the monthly core PCE rises 0.4% or more. In this scenario, safe-haven flows could dominate the action in the American session and provide an additional boost to the USD.
EUR/USD Technical Analysis
EUR/USD trades at around 1.0830, where the lower limit of the ascending regression channel meets the Fibonacci 61.8% retracement of the latest downtrend. This level is also reinforced by the 20-period and the 50-period Simple Moving Averages (SMA) on the 4-hour chart. In case the pair rises above that level and starts using it as support, resistances could be seen at 1.0900 (mid-point of the ascending channel) and 1.0950 (upper limit of the ascending channel).
On the downside, key support area aligns at 1.0800-1.0790 (psychological level, static level, Fibonacci 50% retracement, 200-day SMA) before 1.0770 (100-day SMA, 200-period SMA on the 4-hour chart) and 1.0750 (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.
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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.
