EUR/USD breaks down on euro zone inflation data

EUR/USD broke down below a major parallel uptrend channel on Monday after the Consumer Price Index (CPI) for the euro zone, a key inflation indicator, showed that February’s consumer prices were down by 0.2% from February of 2015.

This deflationary pressure has severely weighed down the euro due to its likely effect of further compelling the European Central Bank (ECB) to implement additional monetary easing measures. The eagerly-awaited ECB press conference is slated for next week, and Monday’s CPI inflation data provides additional support for more easing. ECB President Mario Draghi had already made comments in recent weeks indicating a strong willingness and readiness to take such actions in the face of low inflation and weak economic growth.

As a result, the euro fell broadly against other major currencies on Monday as the US dollar was mixed to modestly higher. As for the dollar, severe doubts earlier in the month with regard to another Federal Reserve rate hike have been mitigated by relatively positive domestic economic data as of late, including last Friday’s positive surprise in fourth-quarter US GDP growth. Scheduled for this coming Friday are the US Non-Farm Employment Change, Average Hourly Earnings, and Unemployment Rate data releases for February. As the US employment situation is one of the primary economic indicators taken into consideration by the Fed in setting monetary policy, these data points are typically crucial in reinforcing or changing interest rate expectations as well as the short-term fate of the dollar.

Monday’s deflation-driven fall in the euro combined with a US dollar that has been increasingly supported by positive US economic data prompted EUR/USD’s noted breakdown below a key uptrend support line within a parallel trend channel extending back to early December’s low near 1.0500. Prior to Monday’s breakdown, the currency pair had already fallen below a convergence of its 200-day and 50-day moving averages, which set the stage for a resumption of the longstanding bearish bias.

With continued trading and further follow-through below the noted parallel trend channel and key moving averages, the next major support target immediately to the downside remains at the 1.0800 level. With any further weakening, EUR/USD could continue its recent downward trajectory towards the major 1.0500 support objective to align with its long-term bearish trend.

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