EUR/USD Forecast: Time to rally? Why US inflation could miss estimates, 1.1880 critical

• EUR/USD has been drifting higher as the market mood improves. 
• Investors focus on US inflation figures, which may have peaked. 
• Concerns about the Delta variant could later weigh on sentiment. 
• Tuesday's four-hour chart is painting a mixed picture. 

One day at a time – markets may be obsessed with one topic on Monday and with another one on Tuesday, and that could be favorable for EUR/USD bulls. The focus for trades is the US Consumer Price Index report for June, which could take the air out of the dollar, at least in the short term.

The economic calendar is pointing to yet another month of high inflation, 4.9% on the headline and 4% in Core CPI, the latter being an increase from May's 3.8%. Investors have begun fearing that these increases are not only base effects – big changes due to falls this time last year – but something more persistent that could result in higher interest rates. 

Another factor pushing prices higher has been the rapid reopening, causing bottlenecks and supply chain issues that could turn from "transitory" to long-term. However, there are signs that some of the air is coming out.

One example is the price of used cars, which surged in recent months as Americans returned to normal life and as a chip shortage caused automakers to postpone production. Early indicators for June are pointing to a downfall.

Source: Manheim

Lumber prices also leaped in recent months as growing demand was unable to meet supply amid a building boom. The chart below is a classic "bubble deflated" one:

Source: CNBC

If inflation figures indeed miss estimates, it could allow the Federal Reserve some breathing room – pushing back the timing of tapering the bank's bond-buying scheme. More dollars printed mean a weaker greenback. Fed Chair Jerome Powell is set to testify on Wednesday. 

US Consumer Price Index June Preview: Has inflation peaked?

Will any inflation-inspired dollar sell-off last? Probably not. The Delta covid variant is spreading rapidly on both sides of the Atlantic – and this is a win-win for EUR/USD bears. France, the Netherlands, and regions in Spain announced new restrictions to curb the contagion, which is mostly hurting the unvaccinated young. These measures hurt the recovery and weigh on the euro. 

While America's growth is also at risk, the dollar is a safe-haven currency that benefits from fear. An increase of 94% in US covid cases – albeit from a low base – could trigger fears in markets. However, that may wait for another day.

See Delta Doom is set to storm America, the dollar could emerge as top do

All in all, the currency pair has room to rise on Tuesday.

EUR/USD Technical Analysis

Euro/dollar is benefiting from upside momentum on the four-hour chart and trades above the 50 Simple Moving Average. Critical resistance awaits at 1.1880, which held the currency pair down in recent days and also in early July. Moreover, that is where the 100 SMA hits the price.

Further above, another cap awaits at 1.1895, a swing high from last week, and then at 1.1945, and 1.1975. 

Support is at 1.1825, which provided support late last week, then 1.1805, a swing low from early in the week. The next cushion is the multi-month trough of 1.1781.