Swelling U.S. Inflation Sends EUR/USD Tumbling

Euro Fails to Find Support Despite Hawkish Signals From the ECB

Last week the Euro had its worst week since April and tumbled below 1.0500 against the USD despite the ECB announcing the end of the asset purchase programme. The European Central Bank also signaled that it is getting ready to hike the interest rate but on the other side of the pond, rising U.S. inflation increased the chances of a 75 bps rate hike in July.

Friday’s U.S. monthly CPI data showed a 1.0% increase, while the yearly CPI accelerated by 8.6%. Both figures exceeded expectations and this sent the 2-year Treasury yield above 3.0%, which is the highest since 2008. The dollar benefitted from this cluster of events and accelerated sharply against its major counterparts but the “storm” may not be over because the week ahead is sprinkled with important announcements.

Key Data for the Week Ahead

The first two days of the week will be relatively lackluster, with the U.S. Producer Price Index (released Tuesday at 12:30 pm GMT) as the only highlight. The action picks up Wednesday at 12:30 pm GMT with the release of the U.S. Retail Sales and Core Retail Sales. Considering that sales made at retail levels represent a major part of the entire economic activity, this release will play an important role in the movement of all USD-related pairs.

The same day, at 6:00 pm GMT, the FOMC is set to meet and release the Economic Projections for the next 2 years, as well as a Statement that contains the outcome of the interest rate vote (the rate is expected to increase to <1.50 from the current <1.0%). Half an hour later, at 6:30 pm GMT, Fed Chair Powell will hold the usual press conference, which will probably contain clues about the next hike.

The final event of the week will be a speech delivered by Fed Chair Powell at the Inaugural Conference on the International Roles of the US Dollar. The event is scheduled for Friday at 12:45 pm GMT but its impact will probably be lower than that of Wednesday’s press conference.

Technical Outlook – EUR/USD

As it turns out, the bounce at 1.0350 that happened on 12 May was just a relief rally, in other words, a normal retracement in a strong downtrend. The pair found resistance at the confluence zone created by 1.0775, the 50-day Moving Average, and the bearish trend line and is now once again on a bearish path, trading at 1.0480 at the time of writing.

The MACD has just crossed bearish, indicating increased momentum, and the RSI is headed straight down. Also, from a fundamental standpoint, the USD is backed by the hawkish stance of the Fed and the ECB has yet to start tinkering with the interest rate.

The combination of all these factors increases the chances of a drop to 1.0350 support and a new attempt to break this level. Of course, the FOMC meeting and the other highlights mentioned prior will play an important role in this week’s price action.