Watch this space as the EURUSD could turn volatile over the next few days!
The currency pair seems to be gearing up for a major move with prices hovering above the key 1.0850 support level as of writing. While a solid breakdown below this level could signal further downside, such may require a strong fundamental catalyst. This may come in the form of the US inflation report on Tuesday or the European Central Bank (ECB) meeting on Thursday.
Before we take a deep dive into what to expect from the latest US CPI report and ECB, it is worth keeping in mind that the EURUSD has dropped over 4% year-to-date. The combination of geopolitical risks, surging energy prices and growth concerns continue to weigh on the Euro despite the ECB joining the hawkish bandwagon. Since the start of 2022, the euro has weakened against every single G10 currency excluding the Japanese Yen and Swedish Krona.
Taking a quick look at the technicals, things are looking noisy on the daily charts with resistance around 1.1120 and support at 1.0850. However, the trend remains firmly bearish on the weekly timeframe. Interestingly, the last time the currency pair secured a weekly close below 1.0850 was back in May 2020 – almost two years ago.
All eyes on the US CPI report…
US inflation is expected to have hit another 40-year high in March.
Consumer prices are forecast to have risen by 8.4% year-over-year, compared to the 7.9% in February. If expectations become reality, this will be the fastest pace since 1981! This could encourage Investors to pile bets on the Federal Reserve adopting a more aggressive pace of rate increases over the next few months – raising speculation around a 50-basis point hike in May (as opposed to the customary 25-basis point moves). Buying sentiment towards the dollar could also receive a boost, which may result in the EURUSD trading lower.
Speaking of the dollar, it has appreciated against most G10 currencies since the start of 2022.
The benchmark dollar index (DXY) is up over 4.4% year-to-date with prices trading marginally below 100.00 as of writing. A solid daily close above 100.00 could open a path towards 101.00 and 102.25.
What to expect from the ECB?
The European Central Bank is widely expected to leave interest rates unchanged when it meets on Thursday. However, it may be unwise to label this as a non-event.
At its last meeting in March, the central bank stated it would accelerate the winding down of its bond-buying stimulus, with the possibility of the scheme ending in Q3 depending on economic data. Minutes from the March meeting were also hawkish, but members of the governing council had split opinions over how to tackle soaring inflation.
Euro area annual inflation surged to an all-time high of 7.5% in March, compared to the 5.9% in February. The recent surge in inflation was the product of geopolitical risks pushing fuel and natural gas prices to record high levels. With inflation now more than 3 times above the ECB target level of 2%, the central bank may be pressured to act. However, the fresh economic uncertainty caused by the war in Ukraine has placed the ECB in a tricky position.
Investors will be paying very close attention to ECB President Christine Lagarde’s speech which could offer fresh clues on the ending of the Asset Purchase Programme (APP) and rate hike timeline. If she strikes a hawkish tone, this could support Euro bulls. However, if the ECB disappoints hawks by adopting a cautious stance, expressing concerns over the economy, and offering nothing new on rate hike timelines, the Euro could weaken.
EURUSD poised to break below 1.0850?
Taking a look at the technical picture, the EURUSD remains in a wide range on the daily charts with support at 1.0850 and resistance around 1.1120. With prices trading well below the 200, 100, and 50-day Simple Moving Average, bears remain in a position of power.
Should prices secure a weekly daily close below 1.0850, this could open the doors towards 1.0780 and 1.0700. Alternatively, a move back above 1.1000 could inspire an incline towards 1.1120. Beyond this point, bulls may challenge 1.1230.
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