If US January CPI disfavours the US dollar, EUR/USD could experience a structural shift higher
EUR/USD holds its ground
EUR/USD is still holding its ground despite increased geopolitical tensions related to the Ukraine and an overnight report from Bloomberg that certain ECB members are losing confidence in their own staff forecasts. Release of US January CPI data today, however, is likely to test the euro’s resolve with economists forecasting a 7.3% print versus 7.0% in December.
Last Thursday’s ECB meeting led EUR/USD and short-term euro area bond yields to rally after the ECB meeting with the former rising to an eventual high of 1.14839. At the meeting, President Christine Lagarde declined to rule out the possibility of an interest rate hike this year. Recent efforts by President Lagarde and other Governing Council members to talk down euro area bond markets have had mixed result.
EUR/USD and vs EUR-USD 2-yr yield spread
In contrast, Governing Council member Klass Knot on Sunday indicated that interest rate rise could come as early as the fourth quarter of this year. Those comments more closely match what’s being priced by interest rate markets. In summary, the odds of the ECB as whole shifting more hawkish when it meets in March have increased dramatically.
EUR/USD primed for a technical shift
However, the EUR/USD is already facing a seminal moment ahead of US CPI data today. The downtrend in the pair that began in October last year is showing sings of fading. On the 4 February, EUR/USD had already tested, broke, but failed to sustain the last corrective swing high of 1.14827 of the current downtrend.
EURUSD daily chart
There is nothing to say that the pair couldn’t yet again try and successfully break that level in coming days if today’s CPI print disfavours the US dollar. If EUR/USD were to do so, it would likely mark dramatic shift in the pair’s fortunes. If it fails, the potential for a fall back to the 1.3745 region, which was a previous level of resistance, or even1.13415, the 4 hour 200-exponential moving average, is more than possible.
