EUR/USD: Weak CPI increases pressure on ECB…again

<p>Market sentiment has stabilized after yesterday’s China-induced panic, but traders remain on edge ahead of the year’s second US trading session. As my colleague Fawad […]</p>

Market sentiment has stabilized after yesterday’s China-induced panic, but traders remain on edge ahead of the year’s second US trading session. As my colleague Fawad Razaqzada noted earlier today, safe havens like gold remain in demand, and that phenomenon has extended to the FX market, where both the US dollar and Japanese yen are catching a bid today.

On the other side of the coin, the European currencies are seeing the majority of the selling pressure, with the euro itself falling the most. From a fundamental perspective, the reason for euro bearishness is obvious: this morning’s December CPI report from the Eurozone showed a lackluster 0.2% year-over-year increase in prices, below the 0.3% gain expected. Meanwhile the core CPI reading, which filters out volatile food and energy prices, rose by just 0.9% y/y. After December’s half-hearted easing measures from the ECB, pressure is already growing for more aggressive action from the Draghi and company, putting the single currency on the back foot once again ahead of the ECB meeting in two weeks’ time.

Technical View: EUR/USD

Speaking frankly, the short-term technical outlook for EUR/USD is just as bleak as the fundamental picture. The pair has broken below key previous support at 1.0800 to a fresh 1-month low. Adding insult to injury, rates have carved out a short-term head-and-shoulders pattern over that period, signaling a shift from buying to selling pressure and marking a potential medium-term top near the 1.10 level.

The secondary indicators are showing what you’d expect: the 4hr MACD is trending lower below both its signal line and the “0” level, though the corresponding RSI indicator is peeking into oversold territory, raising the probability of a short-term bounce.

Nonetheless, the technical bias in EUR/USD will remain to the downside as long as rates hold below previous-support-turned-resistance at 1.0800. With the “divergent monetary policy” theme back in the market’s crosshairs, bears may push for a move down to the Fibonacci retracements of the post-ECB rally at 1.0730 (61.8%) and 1.0690 (78.6%) next, potentially followed by the measured move target of the head-and-shoulders pattern near previous support at 1.0540, depending on this week’s economic data.

EUR4HR1-4-2016 2-43-45 PM

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.