Trade of the Week: EURUSD to suffer another inflation scare?

June 26, 2023

Bloomberg FX model: 74% chance EURUSD will trade within 1.0784 – 1.1010 this week.
Traders to react to Powell vs. Lagarde comments due June 27-28
EURUSD typically sees 38% larger 1-day move on European CPI release days

The world’s most-traded FX pair has managed to shrug off the threat to the Putin regime over the weekend.

While keeping a wary eye over potential developments in Russia, it’s back to the usual grind of watching the incoming inflation data, and interpreting what the CPI numbers could mean for the European Central Bank’s (ECB) next moves on interest rates.

Here’s are two main factors to look out for this week:

1) Speeches by Fed and ECB chiefs

Firstly, note that traders and investors tend to boost the currency of the central bank that appears to have more rate hikes in store (hawkish).

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That’s what markets will be thinking about, as Fed Chair Jerome Powell and ECB President Christine Lagarde are set to offer public comments between Tuesday, June 27th and Wednesday, June 28th.

What markets currently think the Fed will do next?

Markets are only pricing in just one more 25-basis point hike out of the US Federal Reserve for the rest of 2023.

Yet, Fed Chair Jerome Powell has been trying to convince markets since the FOMC meeting earlier this month that the Fed may have 2 more rate hikes this year.

Except that, markets just aren’t buying it.

What markets currently think the European Central Bank (ECB) will do?

Markets expect the ECB to trigger two more 25-bps hikes (50-bps in total) before the year is over.

Hence, no surprise that EURUSD has climbed by about 2% so far this month.

Potential Scenarios:

Should markets finally take heed of Powell’s hawkish messaging, that could lead to a stronger US dollar that drags EURUSD lower.
Alternatively, should Powell’s hawkish intentions be once again pooh-poohed by markets, that may push EURUSD even higher.

2) European inflation data

Thursday, June 29th: Germany June CPI (consumer price index, which is used to measure headline inflation)

Markets are expecting inflation to tick back higher in the Europe’s largest economy:

Month-on-month CPI (June 2023 vs. May 2023) to be 0.2% higher; inflation back to positive growth after May’s 0.1% month-on-month contraction)
Year-on-year CPI (June 2023 vs. June 2022) to be 6.3% higher.
If so, that would mean inflation is ticking back up at a faster pace compared to May 2023’s 6.1% year-on-year number.

Friday, June 30th: Eurozone June CPI

Here are the market’s forecasts:

Month-on-month CPI (June 2023 vs. May 2023) to be 0.3% higher; inflation back to growth after May’s 0.0% month-on-month reading.
Year-on-year CPI (June 2023 vs. June 2022) to be 5.6% higher; a slower annual pace compared to May’s 6.1% year-on-year advance
Core CPI (excluding more volatile items such as food and fuel) to be 5.5% higher year-on-year (June 2023 vs. June 2022).
If so, that would mean inflation is ticking back up at a faster pace compared to May 2023’s core CPI year-on-year number of 5.3%.

Overall, signs of still stubborn inflation may ramp up market bets for more ECB rate hikes.

The prospects of more rate hikes in an economy tend to strengthen its currency.

Potential Scenarios:

Higher-than-expected CPI prints out of Germany/Eurozone later this week may translate into a stronger Euro versus the US dollar.
Alternatively, lower-than-expected CPI prints out of Germany/Eurozone later this week may translate into a weaker EURUSD.

EURUSD tends to post larger-than-average moves on CPI data

So far in 2023, EURUSD has seen an average intraday move of 80 pips between any given day’s highest price and that same day’s lowest.

However, on the days that Germany or Europe releases their respective CPI data, EURUSD tends to see an average intraday move of 110 pips, which is about 38% (or 30 pips) more than the daily average so far this year.

In other words, expect greater EURUSD volatility when Germany and the Eurozone release their respective CPI prints later this week.

Note also that EURUSD has posted larger intraday moves in 3 out of the past four of Germany’s CPI releases, compared to EURUSD’s 1-day move on the day of the Eurozone’s CPI release.

After all, Germany is the largest economy in Europe. Hence, the former’s CPI print is seen as a forerunner to the bloc’s headline CPI print.

Key levels

Potential Support

14-day simple moving average (SMA)
1.08444: intraday low on June 23rd
100-day SMA around 1.080 psychologically-important level

Potential Resistance

1.09426: 50% Fibonacci level from EURUSD’s Jan 2021 – Sept 2022 drop, peak-to-trough
1.09708: intraday high on June 16th
1.10123: recent cycle high