EUR/USD: Bulls need a big beat on German CPI

EUR/USD is operating on slippery grounds and will likely have a hard time defending key support, unless German inflation data, due at 13:00 GMT, blows past estimates, weakening dovish ECB expectations.

The common currency charted a bearish engulfing candle on Wednesday, strengthening the downside bias put forward by the lower high at 1.1097 established on Nov. 21.

The US dollar found love as the third-quarter gross domestic product was revised higher to 2.1% from 1.9%, mainly due to uptick in consumer spending. Core PCE, the Fed’s preferred measure of inflation, which strips out volatile food and energy prices, ticked higher to 2.1% from 1.9% in the second quarter. The inflation gauge bettered an estimate of 1.7%.

The upbeat US data will likely continue to push the dollar higher on Thursday. Meanwhile, traders may offer Euros, as President Trump's decision to sign the Hong Kong Democracy Bill has irked China and triggered fears of fallout on the trade front. This is evident from the 0.25% drop in the S&P 500 futures seen at press time.

All-in-all, EUR/USD appears set for a convincing break below 1.0994, which is the 61.8% Fibonacci retracement of the rally from 1.0879 to 1.1179.

The breakdown may remain elusive if the preliminary German consumer price index (CPI) for November beats estimates by a big margin, creating room for the European Central Bank head Christine Lagarde to maintain her neutral-to-hawkish stance for some time. Last week, Lagarde called for a fiscal boost and said the central bank is monitoring the side effects of its policies.

The CPI is forecasted to drop 0.6% month-on-month in November, having risen by 0.1% in October. EUR/USD may chart a notable bounce from 1.10 if the inflation number beats estimates by a big margin.

On the flip side, a bigger-than-expected drop will likely hasten the drop to recent lows below 1.09.

Technical levels