EUR/USD may test 1.2670 levels ahead of the US CPI data

The single currency has managed to sustain above 1.24 levels since last week, thereby increasing the probability of a technical correction towards 1.27 levels.

The strong German Zew survey data released yesterday has effectively put a floor under the pair around 1.24 levels at least for the current week. Meanwhile, the range bound US treasury yields are further cushioning the pair.

Fed minutes may talk down US Dollar

• Federal Reserve (Fed) policy statement of Oct. 29 tilted a little bit on the hawkish side since the bank dropped their description of “significant under utilization of labor resources”, and sounded more upbeat on the economic growth.

• The minutes due for release today should be broadly in line with the policy statement, and thus likely to be a non-event for the markets.

• However, the minutes might just talk more about the disinflationary impact of the appreciating US Dollar.

• With falling commodity and energy prices, the inflation expectations have already dipped creating a downside risk to the Fed’s 2% inflation target.

• Plus, the US Dollar has strengthened due to the divergent policy expectations from the Fed and other major central bankers.

US CPI expected to fall

• The CPI inflation data for October due for release tomorrow is expected to show a decline in the price pressures year-over-year. Month-on-month the CPI is expected to have declined 0.1% in October.

• However, the data may surprise the markets on the downside, which could push inflation expectations even lower in the US.

US Ten-year treasury yields likely to weaken

• The treasury yields in the US are likely to trade on a weaker note given the high probability of weak CPI data.

• The Ten-year treasury has been in a range of 2.3%-2.4% for a quite a while now. Moreover, the yields were not being able to rise above 2.4% even on the days of a strong data release in the US.

• Thus, the probability of the ten-year yield falling towards 2.25-2.20% is high in the short-term, especially if the price pressures in the US decline more than market expectation.

EUR/USD chart – Positive divergence on daily and weekly chart

• The pair closed 1.2517 resistance yesterday, opening doors for a further upside in the pair.

• The move was supported by positive Price-RSI divergence on the daily chart.

• A similar positive divergence is also seen on the weekly chart, although the weekly RSI is yet to rise above 30.00 levels.

• Hence, the pair is more likely to test the 50 DMA located at 1.2670 ahead of the tomorrow’s US CPI data.