EURUSD breakout hopes boosted

The euro was again the strongest currency among the majors this morning, rising most notably against the yen after the Bank of Japan delivered what turned out to be a rather dovish policy statement. The single currency has found support on the back of Eurozone data, which showed headline consumer price inflation rose in July at its fasted pace since 2012. However, there was no evidence of economic growth as the Eurozone GDP grew a slower pace in the second quarter. This helped to slow down the gains for the EUR/USD, ahead of this afternoon’s US data releases and more important events later on in the week, including the US jobs report on Friday. But with most of the bearish news already out for the euro and bullish news for the dollar also priced in, the EUR/USD could actually resume its long-term bullish trend that it started in early 2017.

Eurozone inflation accelerates while growth stagnates

The Eurozone CPI Flash Estimate for July came in at +2.1% year-over-year, versus +2.0% expected and last. Core CPI was also stronger, accelerating to +1.1% from +1.0% in June. However, the Eurozone GDP Flash Estimate disappointing as it rose only +0.3% in the second quarter compared to +0.4% expected and last. The weakness in growth suggests the ECB's optimistic 2018 forecast could be revised downward again in September. The central bank had already revised downward its 2018 GDP estimate from 2.4% to 2.1% in the June meeting. But with inflation on the rise, this may provide the ECB with more of a headache than the slowdown of the economy. Earlier in the day, German retail sales showed a stronger-than-expected rise of 1.2% in June.

US data dump in the afternoon

Looking ahead to the US session, there are a number of US macro data for investors to consider. Among them is the Fed’s preferred inflation gauge: the Core PCE Price Index, which is expected to have climbed 0.1% in June. Another indicator of consumer inflation will also be released at the same time: the Employment Cost Index. This captures the change in the price businesses and the government pay for civilian labour, and is produced quarterly. In the second quarter, this gauge of consumer inflation is expected to have risen +0.7% compared +0.8% in the first three months of the year. Meanwhile, personal spending and income are both expected to show month-over-month prints of +0.4% each. Later on in the afternoon, we will have the Chicago PMI and CB Consumer Confidence index.

EUR/USD poised for bullish breakout

If the above US macro pointers generally disappoint expectations then the EUR/USD’s prospects of a breakout from its 2.5-month old trading range would increase. At the time of writing, the world’s most heavily traded currency pair was testing the resistance trend of its triangle pattern at around 1.1725 after climbing for three consecutive sessions. In the event we get a clean break above this level, then rates may go on to climb to the top of the range around the 1.1825/50 area, and this time it may even push through this region. However, if the EUR/USD again falters here then a move back down to the support trend of the triangle pattern would be likely, as bullish trader square their long positions ahead of the upcoming fundamental events: FOMC and NFP.

EUR/USD’s range contraction points to possible expansion in August

But our base case is for a bullish breakout and that’s what were are anticipating given the fact that in June rates held above the key long-term 1.16 support handle, forming a monthly doji candle there. A close around current levels today would ensure of a positive close for the month of July, which would result in the formation of the second inside monthly candle in as many months. These monthly inside bar formations tell us what we already know: rates have been contracting. Usually, range contraction is preceded with a phase of range expansion. So in August, we may see either a big breakout or a sizeable sell-off in the EUR/USD exchange rate. We think, as noted, it may be a breakout.