EUR/USD Struggles for Traction Ahead of Major Event Risk

EUR/USD Analysis

EUR/USD Gains Proved Short-lived Ahead of US CPI

On Monday, the BoJ and China posed a challenge to USD dominance, allowing momentary respite for currencies against the greenback. The moment proved to be a very short one seeing that EUR/USD has been unable to pull back to the 200 simple moving average (SMA) around the 1.0831 level.

On Wednesday, US CPI is anticipated to reveal a rise in the headline version of the data set reflecting the recent rise in commodity prices, mainly oil. July’s CPI print rose from 3% the month before to 3.2% and we are potentially going to see a move to 3.6% meaning inflation risks have regained momentum. The US economy is powering ahead as PMI data showed an improvement in business activity and new orders and the Atlanta Fed anticipates Q3 GDP growth could reach 5.6%. The real-time estimate has been known to overinflate actual GDP but nevertheless remains a positive for the dollar and may lead to rate cuts being shifted further along into next year as the ‘higher for longer’ narrative gains traction.

Source: Atlanta Fed, prepared by Richard Snow

Speaking of traction, EUR/USD appears to have lost its footing as the pair continues its slide. EUR/USD bears may have been licking their lips as the pair edged higher, possibly providing a better entry point for trend continuation plays. That proved not to be the case and EUR/USD appears vulnerable to the downside ahead of US CPI tomorrow. The psychological 1.0700 level could come under pressure tomorrow, with the potential to move towards the 38.3% Fibonacci retracement of the major 2021 – 2022 move at 1.0610. Resistance remains at 1.0831.

EUR/USD Daily Chart

Source: TradingView, prepared by Richard Snow

The weekly chart reinforces the current bearish posture of the pair after breaking beneath the ascending channel. There is yet to be a concerted move back towards prior channel support and in the absence of such a move, the pair remains exposed to further selling – particularly as fundamental data worsens in Europe while the US surges on.

EUR/USD Weekly Chart

Source: TradingView, prepared by Richard Snow

Major Risk Events Stack up

US inflation data shifts the week into gear tomorrow with the ECB rate decision on Thursday. Odds are edging closer to a 50/50 split between a 25-bps hike or a pause from the ECB’s governing council. Delaying a hike for one of the remaining meetings this year could prove tricky if inflation fails to continue moving lower. Worsening fundamental data would make a decision to hike a lot harder to get over the line. This week appears like a better option.

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— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX