Inflation Impact on Tightening in Focus, EUR/USD Poised

EUR/USD Analysis

  • Spotlight on ECB press conference: Inflation! Inflation! Inflation!
  • EUR/USD overs around 1.13, pending fundamental catalyst.

EURO FUNDAMENTAL BACKDROP

After recent economic data throughout the region, hawkish pressure has been mounting on ECB officials. Yesterday’s Euro zone CPI beat echoed prior releases from constituent nations in addition to prior growth and employment metrics in several key areas. Markets have bought into this data and it shows within EUR/USD price action, up almost 1.35% this week.

The build-up to the ECB interest rate announcement later today has markets pricing in an almost 100% probability of holding rates (see table below).

ECB INTEREST RATE PROBABILITIES

Source: Refinitiv

Despite mounting inflationary pressures, attention will be given to the post-announcement press conference with particular emphasis on President Christine Lagarde’s outlook on inflation. As of now, the ECB has portrayed a more patient approach to other major central banks with a view of more transitory inflation that is likely to dissipate in late 2022. Should this stance be reinforced, we may see a drop off in Euro strength while an acknowledgement of inflation being more sticky could extend the recent uptrend.

Euro bonds have not been left out of the equation either with 5-year/30-year spreads testing October 2021 lows. Shorter term bonds yields have been accelerating quicker than longer term bond yields traditionally reflective of expectant rate hikes in the near term along with a weak growth outlook long-term (rate hikes can slow economic growth due to the rising cost of borrowing).

EURO 5/30-YEAR INTEREST RATE SWAP SPREAD

Euro 5y/10y interest rate swap spread

Source: Refinitiv

Post-ECB, the US ISM services data (see economic calendar below) will be the next port of call for EUR/USD pundits. Forecasts show a slight decline from previous data but still remains in expansionary territory (above 50).

Economic calendar

Source: DailyFX Economic Calendar

TECHNICAL ANALYSIS

EUR/USD DAILY CHART

EUR/USd daily chart

Chart prepared by Warren Venketas, IG

The daily EUR/USD chart shows hesitancy around the 1.1300 psychological level as traders await the ECB meet. Yesterdays candle closed with a lengthy upper wick which may hint at possible downside to come. The Relative Strength Index (RSI) currently sits around the midpoint 50 level which supports the current mixed price action today.

Resistance levels:

Support levels:

IG CLIENT SENTIMENT DATA: BULLISH

IGCS shows retail traders are currently marginally long on EUR/USD, with 51% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment however, the recent change in long and short positions respectively result in an upside bias.

Contact and follow Warren on Twitter: @WVenketas