EURUSD Rate to Stay Afloat on Sticky Euro Zone CPI

EUR/USD RATE TALKING POINTS

EURUSD pulls back from a fresh monthly-high (1.1412) as Federal Reserve officials tame bets for a rate cutting cycle, but fresh developments coming out of the Euroarea may keep the exchange rate afloat amid signs of sticky inflation.

EURUSD RATE TO STAY AFLOAT ON STICKY EURO ZONE CPI

The near-term breakout in EURUSD appears to have stalled even though the Federal Open Market Committee (FOMC) alters the forward guidance for monetary policy as recent remarks from Chairman Jerome Powell and Co. suggest the central bank is on track to implement an “insurance” rate cut.

It seems as though the Federal Reserve will take steps to insulate the US economy from the shift in trade policy as “many FOMC participants judge that the case for somewhat more accommodative policy has strengthened. 

Image of Fed Fund futures

The Fed appears to be on track to switch gears as the Trump administration relies on tariffs and sanctions to push its agenda, with the US Dollar at risk of facing additional headwinds over the near-term as Fed Fund futures continue to reflect a 100% probability for at least a 25bp reduction at the next interest rate decision on July 31.

However, it remains to be seen if the FOMC will reverse the four rate hikes from 2018 as the economy shows little to no signs of an imminent recession.

Image of DailyFX economic calendar

At the same time, updates to the Euro area’s Consumer Price Index (CPI) may also keep EURUSD afloat even though the headline reading is expected to hold steady at 1.2% as the gauge for core inflation is anticipated to increase to 1.0% from 0.8% in May. 

Indications of sticky price growth may encourage the European Central Bank (ECB) to retain the current policy at the next meeting on July 25, and the Governing Council may continue to endorse a wait-and-see approach as the central bank prepares to launch another round of Targeted Long-Term Refinance Operations (TLTRO) in September.

With that said, the current environment may foster a larger correction in EURUSD even though ECB President Mario Draghikeeps the door open to further support the monetary union as the exchange rate breaks out of the downward trend from earlier this year.

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EUR/USD RATE DAILY CHART

Image of eurusd daily chart

  • Keep in mind, the broader outlook for EURUSD is no longer tilted to the downside as both price and the Relative Strength Index (RSI) break out of the bearish formations from earlier this year.
  • In turn, EURUSD stands at risk for a larger correction as it breaks out of the range-bound price action from May following the failed attempt to test the 1.1000 (78.6% expansion) handle, with the exchange rate trading above the 200-Day SMA (1.1350) for the first time since in over a year.
  • Waiting for a close above the 1.1390 (61.8% retracement) to 1.1400 (50% expansion) region to bring the Fibonacci overlap around 1.1430 (23.6% expansion) to 1.1450 (50% retracement) on the radar, which lines up with the March-high (1.1448), with the next area of interest coming in around 1.1510 (38.2% expansion) to 1.1520 (23.6% expansion).

For more in-depth analysis, check out the 2Q 2019 Forecast for Euro

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.



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