EUR/USD Outlook: Could extent the post-US CPI slide once 23.6% Fibo. support is broken

The EUR/USD pair witnessed aggressive selling during the second half of the trading action on Wednesday and dived to weekly lows amid resurgent US dollar demand. Against the backdrop of an extended selloff in the equity markets, the safe-haven USD got a strong boost following the release of a red-hot US consumer inflation report. The headline CPI rose 0.8% MoM in April and accelerated to a 4.2% YoY rate. This marked the fastest rise since September 2008 and was significantly above the Fed's 2% target. Adding to this, core CPI (excluding food and energy) increased 3.0% YoY during the reported month.

A surge in consumer prices fanned speculations about an earlier than anticipated tightening by the Federal Reserve, which was evident from a sharp intraday spike in the US Treasury bond yields. In fact, the yield on the benchmark 10-year US government bond jumped back closer to the 1.7% threshold and extended some additional support to the greenback. The USD bulls seemed rather unaffected and largely shrugged off the Fed Governor Richard Clarida's comments, reiterating that inflation above 2% is due to transitory factors. Clarida also highlighted uncertainty about the near-term labour market outlook.

On the other hand, the shared currency struggled to find any support from the fact that the European Commission upgraded its economic projections. The Eurozone GDP growth forecast for 2021 was raised to 4.3% and 4.4% for 2022 from 3.8% previously. Inflation is projected to climb to 1.7% in 2021 but fall back to 1.3% in 2022. The unemployment rate is anticipated to rise to 8.4% in 2021, then drop to 7.8% in 2022.

Nevertheless, the pair settled near the lower end of its daily trading range, down over 85 pips from the intraday swing highs, albeit lacked any strong follow-through selling. The pair managed to find some support ahead of mid-1.2000s and edged higher during the Asian session on Thursday. A goodish rebound in the US equity futures held the USD bulls from placing aggressive bets and turned out to be a key factor that extended some support to the major. Given that most European markets will be closed in observance of Ascension Day, the USD price dynamics will continue to play a key role in influencing the pair.

Later during the early North American session, the US economic docket – highlighting the release of the usual Initial Weekly Jobless Claims and Producer Price Index (PPI) – will be looked upon for a fresh impetus. Apart from this, the US bond yields, along with the broader market risk sentiment will drive demand for the greenback and produce some trading opportunities around the major.

Short-term technical outlook

From a technical perspective, the pair, for now, seems to have found some support near the 23.6% Fibonacci level of the recent strong move up from YTD lows touched on March 31. Some follow-through selling might prompt traders to further unwind their bullish bets and turn the pair vulnerable to test 38.2% Fibo., or levels just below the key 1.2000 psychological mark. The corrective slide could further get extended towards a confluence support near mid-1.1900s, comprising of the very important 200-day SMA and 50% Fibo. level. This should act as a strong base for the major, which if broken decisively will shift the near-term bias in favour of bearish traders.

On the flip side, the 1.2100 round-figure mark now seems to act as an immediate hurdle. Any subsequent positive move might continue to confront stiff resistance and meet with some fresh supply near the 1.2160-65 region. A sustained strength beyond will be seen as a fresh trigger for bullish traders and push the pair further beyond the 1.2200 round-figure mark, towards testing February monthly swing highs near the 1.2240-45 region.