EUR/USD traders lock on to US Consumer Price Index release
- EUR/USD trades slightly higher on Tuesday ahead of US CPI data for February.
- US inflation is set to shape expectations of the timing of Fed interest rate cuts – a US Dollar driver.
EUR/USD edges higher, trading up about a tenth of a percent on Tuesday during the early European session just after the release of German inflation data, which came out unrevised from the preliminary estimates and in line with expectations..
Traders, however, are mainly locked on to the next big data release for the pair, US Consumer Price Index (CPI) inflation data, which is scheduled for 12:30 GMT.
The CPI report could be a key factor in determining when the US Federal Reserve (Fed) will start cutting interest rates. If inflation comes out lower than expected, it could bring forward the moment when the Fed pivots.
This would be negative for the US Dollar as lower interest rates tend to attract less foreign capital inflows.
Traders on tenterhooks ahead of release of US CPI
US CPI is likely to be a major driver for EUR/USD.
Economists expect the US Consumer Price Index ex Food and Energy to moderate to 3.7% YoY in February, from 3.9% in January, and to gain 0.3% MoM from 0.4% previously.
The broader headline CPI figure is forecast to show a 3.1% YoY rise in February, unchanged from the previous month, and a 0.4% rise MoM from 0.3% registered in January.
According to the CME FedWatch Tool, which calculates a market-based expectation of when the Federal Reserve will begin reducing its Fed Funds Rate, the probability of a first cut in March is 3%, of one or more 25 bps cuts by May 17.1%, and one or more cuts by June 71.4%. The probabilities for May have substantially fallen overnight, from over 30% on Monday.
Euro overpriced and likely to fall
The Euro is overpriced given the relatively weaker growth in the Eurozone and the likelihood of earlier rate cuts in Europe compared to the US, says BNY Mellon strategist Geoffrey Yu.
In an interview with Bloomberg news on Monday, the strategist said he expects the Euro to weaken against the US Dollar in 2024.
“I’m still holding onto my view that at some point this year we’re going to get parity with the Dollar,” said Yu.
Weakness is likely to come from a two pronged attack on the Euro, from a combination of a weak economy and the European Central Bank (ECB) cutting interest rates before the Fed.
Recently EUR/USD failed to sustain highs just shy of 1.1000 after Banque de France Governor, François Villeroy de Galhau and Bundesbank President Dr. Joachim Nagel, both said that a rate cut in the spring might be warranted.
De Galhau said that “spring goes from April to June 21.”
Their stance is more radical than that of ECB President Christine Lagarde, who said she saw June as the time for the ECB to review its interest rate policy at her press conference after the policy meeting on March 7.
Technical Analysis: EUR/USD pulling back
EUR/USD has corrected back from its 1.0981 peak established on March 8.
Despite the correction, the pair remains in a short-term uptrend with peaks and troughs making consistently higher highs and higher lows on the 4-hour chart. This overall still favors bullish bets.
Euro vs US Dollar: 4-hour chart
The pair seems to have completed a three-wave ABC Measured Move pattern, however, suggesting the possibility of a fairly substantial correction unfolding.
The pullback has already traced out in three waves since Friday’s top, and there is a possibility it may have completed.
However, it is also possible it could fall even lower. One possible zone where the correction could find support is between the 1.0898 (February 2 high) and the top of the Measured Move’s A wave at 1.0888.
The correction could still fall back to as low as support in the 1.0860s. However, given the uptrend bias, price will probably eventually find a floor, recover and resume climbing.
The formation of a short-term reversal pattern such as a bullish candlestick reversal pattern would provide a clue the uptrend could be restarting.
Resumption of uptrend
A break above 1.0955 would provide stronger evidence the uptrend was resuming. A move above the 1.0981 high of March 8 would provide a strong signal the bullish trend was further evolving.
The tough resistance expected at 1.1000, however, could see such an up move short-lived unless supported by compelling fundamentals. The 1.1000 psychological level is likely to be the scene of a battle between bulls and bears, with more volatility.
A clear and decisive break above 1.1000, however, would open the gates to further gains towards the next key resistance level at 1.1139, the December 2023 high.
Such a decisive break would be characterized by a long green bar piercing clearly above the level and closing near its high or three green bars in a row, breaching the level.
Euro FAQs
The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.