The other day, US markets were closed for the federal holiday. Despite the thin market, the single European currency managed to assert strength. In fact, the euro began growing in the Asian pre-market.
Earlier, EUR/USD was at a standstill during the European session when a few eurozone’s countries released CPI reports. As a rule, market participants are alert to inflation data. Today, traders will get to know preliminary inflation data for the EU. This data should no way be neglected. For example, consumer inflation in Italy rose from 1.1% to 1.3%, shy of the expected 1.5% growth.
It could mean that inflation in Europe has moderated and it is unlikely to leap anymore. A sharp increase in consumer prices is something that causes concern. In this case, the ECB will have no choice other than to raise the refinancing rate. Apparently, the EU economy is not ready for this move.
Italy CPI, y/y
Unlike Italy’s CPI which dispelled investors’ fears, Germany’s inflation data spooked market participants. The CPI in the largest eurozone’s economy sharply climbed from 2.0% to 2.5% in May, stronger than the expected 2.3% rise. All in all, inflation in Germany has been growing faster than expected. If consumer inflation is accelerating in the EU powerhouse, this could bolster inflation in the whole eurozone.
Germany CPI, y/y
So, the flash CPI for the EU is on investors’ radars today. According to the consensus, the CPI is expected to have grown to 2.0% in May from 1.6% in April. It means that the CPI has reached the ECB target level. In other words, the fact that inflation stands at the target level increases the likelihood of the ECB monetary tightening.
A couple of years ago, the market would have cheered such prospects. The situation is different nowadays. Everyone is aware that raising a refinancing rate will worsen economic conditions until the EU economy recovers from the pandemic-driven crisis. The thing is that the ECB has no choice because inflation is steadily on the rise.
If inflation gets out of control, this could entail bad consequences. To tame rampant inflation, the only solution for a central bank is to resort to a rate hike. Experts warn that inflation growth in the whole eurozone could be even faster than runaway inflation in Germany. To sum up, such prospects are bearish for the single European currency.
EU CPI, y/y
June 31, EUR/USD was trading rather actively. As a result, the currency pair managed to break the trading range of 1.2180/1.2205 upwards. The speculative activity at the moment of the breakout pushed the euro up so that the price approached resistance of May 19 and 21.
EUR/USD is still trading in a choppy market that is confirmed by the structure of candles and a high degree of speculative trades.
At present, the area of 1.2235/1.2245 is acting as resistance, thus putting pressure on the buyers. As a result, they cut long positions.
Under the current market conditions, it would be a good idea to watch the price drop from the resistance area towards the previous range of 1.2180/1.2205. Now the currency pair is losing the bullish momentum. To maintain the momentum, the price has to hold firmly above 1.2250 in a 4-hour chart.
In terms of complex indicator analysis, we see that technical indicators both in a 1-hour and a daily chart are signaling long opportunities. At the same time, a 1-minute chart is generating sell signals while the price is dropping from resistance.
Sincerely, InstaForex Group analyst, Dean Leo