Markets Eye CPI as Strong NFP Boosts Dollar Outlook

EUR/USD trades below major moving averages after support break

The US Dollar posted substantial gains after the release of the Non-Farm Payrolls (NFP) report on Friday; the NFP showed that 172K new jobs were created last month, more than double the forecast of 85K. A strong labor market, coupled with concerns of rising inflation due to high oil prices, could trigger a shift towards a more hawkish stance of the Fed, and possibly higher interest rates.

The US – Iran peace talks are at a stalemate, and tensions flared up last week with multiple violent clashes reported. The Strait of Hormuz is still closed, which means that the oil price remains elevated and inflationary pressures grow. As part of a deal, Tehran leaders have asked for a ceasefire between Israel and Lebanon – this would also be a condition for the reopening of the Strait.

This week, attention will turn to US inflation with the release of the CPI report, which will show the extent of the impact from higher oil prices.

Economic Calendar Highlights

There are no major releases throughout the first two days of the week, but action will pick up on Wednesday, with the release of the US Consumer Price Index (CPI), scheduled at 12:30 pm GMT. The monthly Core CPI is expected to jump 0.5% from the previous 0.4%, but the headline CPI is expected to drop 0.3% from the previous 0.6%. Higher inflation eventually leads to a hawkish Fed (higher rates). According to the CME FedWatch tool, at the time of writing, there’s a 95.4% chance the Fed will maintain the rate unchanged at the June meeting.

Traders’ attention will shift towards the euro on Thursday, as the European Central Bank (ECB) is expected to raise the interest rate from the current 2.15% to 2.40%. The release is scheduled for 12:15 pm GMT and will be followed at 12:45 pm GMT by the ECB press conference, where ECB President Christine Lagarde will discuss the interest rate decision and will probably provide clues on the ECB’s next moves.

The US Producer Price Index (PPI) will also be released on Thursday, at 12:30 pm GMT. The indicator has inflationary implications because a higher price charged by producers will eventually be passed on to the consumer.

Technical Outlook – EUR/USD

The dollar ended last week very strong, after a lot of back-and-forth on the support at 1.1600. Now this key support is clearly broken, and the pair is trading below all three moving averages (50-day, 100-day, and 200-day MAs).

The next probable destination is the support at 1.1400, where we will likely see a bounce higher. If/when the pair reaches the mentioned support, the RSI will probably become oversold, raising the probability of a bounce higher. A break of 1.1400 would mark the end of the long-term trading range between 1.1900 and 1.1400.