- EUR/USD entered the new week trading near nine-month highs with room to test psychological resistance at 1.10.
- This happens if the latest euro zone inflation figures lead to the European Central Bank (ECB) tightening next Thursday, or if the US dollar remained under pressure.
- The EUR/USD declined yesterday to the support level 1.0839 from the resistance 1.0914 in the same trading session. The last gain was the 1.0929 level.
Euro gains could rise further if Spanish inflation numbers are any indication of how euro zone data will unfold on Wednesday. Overall, the path to the upside is blocked by upward technical resistance near 1.0945 on the charts, but EUR/USD may gain the momentum to overcome it if inflation surprises on the strong side of expectations on Wednesday and leads the European Central Bank to a higher price target result with its benefit.
Overall, the Spanish data out on Monday made it clear that the risks around Wednesday's Eurozone numbers are on the upper side of consensus on inflation falling from 9.2% to 9% this month and core inflation falling from 5.2% to 5.1%. Higher inflation could be positive for the euro against the dollar if it leads to a sharp increase in interest rates more than otherwise, although European Central Bank officials have indicated for weeks that they are already likely to raise borrowing costs by half a percent increases in both January and March policy decisions.
While domestic developments may be more supportive of the single European currency this week, there is also a federal policy decision and a busy schedule of US economic data this week, which could help the dollar get back on its feet and dampen the EUR/USD recovery.
The American data calendar this week will witness the release of labor cost figures today Tuesday before the Institute of Supply Management (ISM) purchasing managers' index survey for the manufacturing and service sectors on Wednesday and Thursday, then the US non-agricultural jobs report for January on Friday. The price of the dollar sometimes rises in response to worse than expected economic data, which means that the euro may be susceptible to any negative surprises. Meanwhile, attention will also be focused on whether the US Federal Reserve will go out of its way to reverse the recent easing of financial conditions that has been driven by declines in bond yields and the EUR/USD's strong rally since November.
Expectations of the euro against the dollar today:
According to the trades of the last sessions, the bears are trying to push the EUR/USD currency pair down amid selling operations. The general trend may change to a downward one if the currency pair moves towards the support levels of 1.0790 and 1.0685 respectively.
On the other hand, breaking through the 1.0925 resistance will again be important for increasing expectations to move towards the psychological resistance 1.1000 and so on. I expect a movement in a narrow range for the euro-dollar currency pair until the markets and investors react to data and events this week led by announcements from both the European Central Bank and the American Federal Reserve Bank.
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