Inflation Concerns: US CPI Meets ECB’s Rate Decision

EUR/USD Outlook: Divergence, Trend Lines, and Key Levels.

The greenback is coming off three-month highs against the Euro and the Pound, and the talk of the town is U.S. inflation data due later this week. Inflation has been at the forefront of the Forex market for a long time now, with central banks scrambling to contain it.

The European Central Bank will meet this Thursday, followed next week by the Federal Reserve. Currently, markets are pricing in a 40% probability that the ECB will raise the interest rate by 25 bps. On the other side of the pond, there’s a 93% probability that the Fed will leave the rate unchanged, according to CME’s FedWatch tool.

Key Data for the Week Ahead

The German ZEW Economic Sentiment survey is the first notable release of the week and is due Tuesday at 9:00 am GMT. It’s a leading indicator of economic health derived from the opinions of about 300 German institutional investors and analysts.

Wednesday at 12:30 pm GMT we take a look at the key gauge of U.S. inflation: the Consumer Price Index (CPI). The month-by-month figure is expected to show a 0.6% change compared to the previous 0.2%. The yearly inflation is expected to rise to 3.6% from the previous 3.2%. If such a hefty change happens, it will likely affect the Fed’s monetary policy going forward.

The ECB will announce the interest rate on Thursday at 12:15 pm GMT. The rate is expected to remain unchanged but, as mentioned earlier, there is still a 40% chance it will get bumped up by 25 bps. The ECB press conference is set at 12:45 pm GMT. Volatility usually skyrockets during this presser but a lot depends on ECB President Lagarde’s stance and tone.

The same day at 12:30 pm GMT we take a look at the U.S. Producer Price Index (it has inflationary implications) and at the U.S. Retail Sales. Both are important indicators that can affect the Fed’s rate decision.

The last couple of releases of the week concern the US Dollar: the Empire State Manufacturing Index and the Prelim UoM Consumer Sentiment survey. The former is set to be released at 12:30 pm GMT on Friday, while the latter is scheduled for 2:00 pm GMT.

Technical Outlook – EUR/USD

The dollar has been on the offensive since the failed attempt to break 1.1175 resistance. But now it looks like the USD bulls are looking to take a breather.

On the 1st of September, the pair broke a long-term bullish trend line (drawn from February – March lows). Oftentimes, after a break of an important S/R level, the price returns to re-test it. If this happens, then we will see a move back above 1.0775 and into the recently broken trend line.

Although the RSI is not oversold, we can see that the price is making lower lows, while the indicator is making a double bottom (we can’t call it a lower low). However, this is still a form of divergence, which may trigger a bounce higher.

As always, keep a lookout for the major economic releases of the week because they could very well change the course of the pair.