EUR/USD - All eyes on Inflation differential and trend line support

The EUR/USD pair dropped to a low of 1.1704 yesterday before ending the day with moderate gains at 1.1772 on the back of a dismal US PPI reading. 

Trend line support is a tough nut to crack

Despite the risk-off tone and the improvement in the US-German 10-yr yield spread, the support offered by the trend line sloping upwards from the June 23 low and July 13 low has remained intact. Moreover, the previous two daily candles carry a long lower shadow/tails, which highlights dip demand. 

US inflation is finally picking up

A Bloomberg survey shows the core CPI, which excludes food and energy, probably rose 0.2% in July. If the actual reading does match estimate, it would mark an end of a four-month streak of below forecast readings. 

It is crystal clear by now that the fate of the USD is directly tied to inflation readings. A better-than-expected core CPI could yield a break below the rising trend line support seen today at 1.1708. 

On the other hand, a weak CPI reading would weaken the case for a Fed rate hike, add credence to the daily candles with long lower shadows and shall open doors for a re-test of the recent highs around 1.1910 levels. 

The US CPI reading is due at 12:30 GMT. Meanwhile, the final German CPI reading may not move markets, unless there is significant upward/downward revision of the preliminary numbers. 

EUR/USD Technical Levels

The spot remains flat lined around 1.1770. A break above 1.18 [10-DMA] would expose 1.1824 [Aug 8 high], above which a major hurdle is seen directly at 1.1910 [recent high]. On the downside, an end of the day close below 1.1708 [trend line support] would indicate that the rally from the June 20 low of 1.1119 has ended. The spot could then test support at 1.1613 [July 26 low] and 1.1583 [July18 high].