EUR/USD Forecast – Stronger-than-Expected US CPI Reading Could Sink the Euro

The Euro is edging higher against the U.S. Dollar on Tuesday with the single currency tracking a rebound in demand for higher risk assets ahead of a key U.S. inflation report and speeches by Federal Reserve members.

Today’s consumer price report is expected to show how effective Federal Reserve policy tightening has been in taming inflation.

At 11:00 GMT, the EUR/USD is trading 1.0762, up 0.0037 or +0.34%. On Monday, the Invesco CurrencyShares Euro Trust ETF (FXE) settled at $98.95, up $0.41 or +0.42%.

Traders Eyeing US Consumer Price Index

Investors are expecting that the headline Consumer Price Index (CPI) will show a 0.4% increase in January, which would translate into 6.2% annual growth, according to Dow Jones. Excluding food and energy, so-called core CPI is projected to rise 0.3% and 5.5%, respectively.

However, another indicator indicates the inflation figures could be even higher.

The Cleveland Fed’s “Now cast” tracker of CPI components is pointing toward inflation growth of 0.65% on a monthly basis and 6.5% year over year. On the core, the outlook is for 0.46% and 5.6%.

What the CPI Data Will Mean to the Euro

Ahead of the CPI report, the market believes the Fed seems intent on raising rates another 50 basis points. That would take the current target range of 4.5%-4.75% to 5.0%-5.25%. Market pricing also indicates that the Fed will stop at a “terminal rate” of 5.18%.

A much stronger than expected report will give the Fed more evidence to lift rates higher and for longer. This would be bullish for the dollar and consequently, bearish for the Euro.

Meeting or coming in under the forecast is not likely to change the Fed’s mind about implementing a pair of 25 basis point rate hikes in March and June.

EUR/USD traders have to be ready for a surprise, however, since it is possible that traders have already priced in the next two rate hikes.

Daily EUR/USD Technical Analysis

The main trend is down according to the daily swing chart. However, momentum shifted to the upside following the confirmation of Monday’s closing price reversal bottom.

A trade through 1.0656 will negate the chart pattern and signal a resumption of the downtrend. A move through 1.1033 will change the main trend to up.

The minor trend is also down. A trade through 1.0791 will change the minor trend to up. This will confirm the shift in momentum.

The nearest support is a pair of 50% levels at 1.0723 and 1.0661. The closest resistance is a 50% level at 1.0758 and a minor top at 1.0758.

Daily EUR/USD Technical Forecast

Trader reaction to the minor pivot at 1.0723 is likely to determine the direction of the EUR/USD on Tuesday.

Bullish Scenario

A sustained move over 1.0723 will indicate the presence of buyers. This could lead to a labored rally with potential targets lined up at 1.0758, 1.0791 and 1.0851. The latter is a potential trigger point for an acceleration to the upside with 1.0943 the major target.

Bearish Scenario

A sustained move under 1.0723 will signal the presence of sellers. The first downside target is the support cluster at 1.0661 – 1.0656. The latter is a potential trigger point for an acceleration to the downside with 1.0483 the next major target.