EUR/USD - It’s all about inflation differential

EUR/USD hit a one-week low of 1.1370 on Thursday even though the American dollar was showing no signs of lift against other majors. 

EUR’s underperformance could be due to the fact that quite a few ECB members have expressed caution on inflation. ECB’s Rimsevics joined the bandwagon yesterday after he talked about inflation being well below the ECB target and the necessity to run the QE program for “a few years”. 

Across the pond, the Fed policymakers too have started taking note of the weak inflation. Fed’ Yellen said yesterday that a strong labour market and rising prices of imported goods support her expectation that a recent downturn in inflation would prove transitory. However, the Fed chief warned on Wednesday that the policy tightening path could be adjusted if the inflation continues to remain weak. 

Thus, inflation differential is the single most important piece of data for the EUR/USD pair. 

Focus on US CPI

US June CPI is seen rising 0.1% m/m. That amounts to 1.7% y/y rise in June compared to May’s 1.9% print. The annualised core CPI is seen rising 1.7%. The 10-year breakeven rate (long-term inflation expectations) currently stands at 1.76%. Meanwhile, the 5-year, 5-year forward inflation expectation rate currently stands at 1.89%. 

The EUR / USD could witness a pullback to 1.1312 (July 5 low) if the US CPI beats estimates. Moreover, a strong data would push up inflation expectations and strengthen the bid tone around the US dollar. On the other hand, weak inflation number could weigh over the USD. Traders would also take cues from the core retail sales print.

EUR/USD Technical set up

FXStreet Chief Market Analyst Valeria Bednarik writes, “The 4 hours chart shows that the price settled below a flat 20 SMA, whilst the Momentum indicator hovers around its mid-line and the RSI indicator turned marginally lower around 45, not enough to confirm additional slides ahead. The same chart shows that a daily ascendant trend line converges with a bullish 100 SMA around 1.1340, a strong support that once broken will open doors for a steeper decline that will turn into a bearish movement only on an extension below 1.1290.

EUR/USD Technical Levels

Resistance: 1.1456 (previous day’s high), 1.1490 (weekly high), 1.1534 (Feb 2015 high), 1.1616 (May 2015 high)

Support: 1.1396 (10-DMA), 1.1370 (previous day’s low), 1.1343 (4-hr 100-MA), 1.1312 (July 5 low)