- EUR/USD has been extending its gains amid an improved market mood.
- The Fed and investors are eagerly awaiting critical US inflation figures.
- Tuesday's four-hour chart is painting a mixed picture.
Only an upside correction or the beginning of a rally? With technicals showing a balance between bulls and bears, the answer depends on the most important event of the week – US inflation. The publication has the potential to move EUR/USD dozens of pips. To what direction?
Investors are focused on the Core Consumer Price Index (Core CPI) measure for August, which is also closely watched by the Federal Reserve. The central bank wants underlying prices to hover around 2% and persistently high inflation of over 4% makes it uncomfortable and could push it to taper its bond-buying scheme sooner. The Fed creates $120 billion per month.
The economic calendar is pointing to a minor moderation in Core CPI, from 4.3% YoY in July to 4.2% YoY in August. That would probably support the dollar it would erode the theory that hot inflation is only a result of the rapid reopening of the economy. A higher level would give the greenback even more room for gains.
On the other hand, a level of 4% or lower would show some cooling off, and lessen the pressure on the Fed to act. The dollar could tumble. Chair Jerome Powell insisted indicated tapering will have to wait beyond the upcoming decision next week, but the following encounter is undoubtedly in play.
Apart from inflation, Europe maintains an advantage over the US when it comes to both COVID-19 cases and the rate of vaccinations. On the other hand, the European Central Bank's taper decision last week was softened by an insistence that the institution is only "recalibrating" its policy and also the lack of worry about inflation.
Overall, the fundamental picture is balanced, leaving the stage for US CPI.
EUR/USD Technical Analysis
Euro/dollar has risen above the 100 and 200 Simple Moving Averages (SMAs), a bullish sign. On the other hand, it trades below the 50 SMA. Momentum has flipped to the upside, but only just.
Some resistance is at the daily high of 1.1830, and that is followed by the stronger resistance line of 1.1880, which capped a recovery attempt earlier this month. The next level to watch is 1.1910.
Support awaits at 1.18, which cushioned EUR/USD last week, and then by the weekly low of 1.1770. Further down, 1.1740 and 1.1725 are in play.
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