- The price of the EUR/USD currency pair is still moving in a narrow range, stable around 1.0975 at the time of writing.
- As I mentioned before, the performance will remain until the reaction from the release of US inflation figures later Thursday.
- The forex market appears to be very confident of another bearish surprise from the release of the US CPI, suggesting that the risks are tilted to the downside in the event of higher-than-expected data.
A higher-than-consensus reading is likely to prompt the Federal Reserve to raise US interest rates again in September in a move that would support US bond yields and possibly affect investor sentiment; Two developments that would support the dollar. Commenting on this, traders at Citi say that market participants are anticipating a weak CPI release that could potentially undermine the US dollar, and given such an outlook, larger market moves are likely with bullish surprises in the data.
“Expectations remain subdued, so direct print is unlikely to see USD selling,” says a note from CitiFX Wire.
The market is positioned to read CPI inflation at 0.2% m/m and 3.3% y/y, up from 3.0%. Core CPI - which is likely to be more influential than the core CPI - is expected to read 0.2% m/m and 4.7% y/y.
The US dollar receives the report with some wind, as it has been on the rise since mid-July, as the medium-term trend stalled for weakness and then retreated. The move saw the EURUSD exchange rate drop from its high near 1.12 to below 1.10 at the time of writing. If the data comes in ahead of expectations, the recent trend of the dollar rally is likely to extend and key support levels in the EUR/USD and GBP are likely to give way to fresh multi-week lows. For their part, analysts at JP Morgan say that the current backdrop is already supportive of more dollar strength and see gains at the end of the year as possible.
The US exceptions point to the continued strong performance of the US economy which has supported US yields and the dollar recently. Meanwhile, the increasing supply of Treasury bonds to fund the government has put more pressure on bond yields, which in turn attracts foreign capital inflows and supports the US dollar. Seasonality means that August is traditionally a month of low liquidity and that scarcity has traditionally supported the dollar.
In fact, Citi - the world's largest primary forex dealer - said its London dealing desk noted trading volumes were down nearly 30% from the average of the past 30 days. However, the USD's bullish stance is not a consensus trade for the coming months as some analysts see a recovery in EUR/USD as possible once the current USD counter-trend fades.
EUR/USD Technical Outlook
The price of the EUR/USD currency pair formed lower peaks and found support at 1.0930, forming a descending triangle, according to the performance on the hourly chart. The price has just bounced from support and may be due to another test of resistance at the key psychological level of 1.1000. The 100 SMA is below the 200 SMA to indicate that the general trend is still down or that the top of the triangle is more likely to hold than to break.
The pair is also trading below both moving averages, so they could hold as dynamic resistance levels in the near term. However, the gap between the indicators is narrowing to reflect a slowdown in bearish pressure and a possible bullish crossover. In this case, the EUR/USD may see a rebound in bullish momentum that could cross the top of the triangle and enter a rally that is the same height as the chart formation.
The stochastic is heading higher to show that buyers are in control, but the oscillator is also approaching the overbought area to indicate exhaustion soon. A shift to the downside could mean that the bears are regaining control and the EURUSD could return down to the support of the triangle. And the RSI has more room to run before reaching the overbought zone, so buyers can stay in control for a while longer.
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