Some Respite for EUR/USD as EU Core Inflation Remains Elevated at 3.8%


EUR/USD TALKING POINTS

  • Ongoing inflationary pressures from the EU support hawkish bets.
  • The ECB is walking a tightrope.
  • EUR/USD is holding above 1.05 for now.

FUNDAMENTAL CONTEXT OF THE EURO

The core of the euro area inflation the print arrived as expected at 3.8% (see calendar below) for the month of May which reinforced euro higher after the release after a negative start to the European trading session. We can expect this to continue to rise as supplies of crude oil and natural gas continue to be constrained, leaving the Eurozone in dire straits. The euro is by no means reversing the longer-term downtrend, adding to inflationary pressures, giving the ECB more food for thought as it grapples with widening bond spreads and fading the euro.

The economic calendar shifts to the US as we close out the week with our eyes on Fed Chairman Jerome Powell as well as industrial production numbers which could have some influence on the EUR/USD pair. .

EUR/USD ECONOMIC CALENDAR

Source: DailyFX Economic Calendar

Ahead of today’s core inflation reading, the euro gained on global currency buying against the dollar after expectations for global tightening rose and the greenback retreated. That being said, my medium/long term view remains supportive of the dollar, with the Eurozone facing much greater (uncertain) challenges relative to the US.

Bond spreads are a concern for investors European Central Bank (ECB) and was reiterated last night by Chairman Christine Lagarde stating that there are plans in place to impose limits on rate spreads to head off further fears in the region.

TECHNICAL ANALYSIS

EUR/USD DAILY CHART

eurusd daily chart

Chart prepared by Warren VenketasGI

price action on the EUR/USD daily chart shows that the bulls are barely breaking out of what could have been a significant decline if the 1.0340 the support handle was broken. Although the Euro has had some support from external factors, if prices reach the key confluence area around Trendline resistance (black), I would be looking for a downside ahead, as central bank divergence remains heavily skewed in favor of the Fed, then the dollar.

Resistance levels:

  • Trendline resistance (black)
  • 1.0601
  • 50 day EMA (blue)
  • 20-day EMA (purple)

Support Levels:

IG CUSTOMER SENTIMENT DATA: MIXED

The IGCS shows that retail traders are currently LONG on EUR/USDwith 69% of traders currently holding long positions (as of today). At DailyFX, we generally take a contrarian view of crowd sentiment, but due to recent changes in long and short positioning, we come to a mixed bias.

Contact and follow Warren on Twitter: @Wenketas

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