EU CPI comes in much higher than expected

The main driver of currencies this week has been the Russian invasion into Ukraine. However, traders can’t overlook the most important piece of economic data when it comes to interest rates: inflation. After the stronger than expected harmonized readings for February CPI from Germany, Italy, Spain, and France, it’s not surprising that the headline print for the Eurozone Flash CPI was stronger than expected.  The reading was 5.8% YoY vs 5.4% YoY expected and 5.1% YoY in January!  This was a record high for Euro Zone CPI.  Core CPI, which excludes energy, food, alcohol and tobacco, was up 2.7% YoY vs 2.5% YoY expected and 2.3% YoY in January.

It should be noted that the ECB targets 2% inflation and that February’s increase was before energy prices began to skyrocket because of the Russia/Ukraine conflict. Will continued high CPI cause the ECB to move up it’s timeline for decreasing asset purchases, or even allow the markets to look for a rate hike sooner than the end of year?

ECB’s de Guindos said earlier today that the invasion of Ukraine by Russia will not only have an impact on the economy in the Eurozone, but it will also have an impact on inflation. Therefore, it would seem, that de Guindos is expecting inflation to continue to rise.  The next ECB interest rated decision meeting is next week

EUR/USD has been moving lower in a downward sloping channel since May 2021.  Today, the pair reached its lowest level since May 2020, near 1.1059.  Notice that the correlation coefficient between the EUR/USD and USD/RUB is -0.87.  A correlation coefficient of -1.00 means that there is a perfectly negative correlation between the 2 assets and that they move In opposite directions 100% of the time. A reading below -0.80 is considered a strong negative correlation.  Therefore, if USD/RUB continues to  move higher, one can expect EUR/USD to continue to move lower.

Source: Tradingview, Stone X

On a 240- minute timeframe, price has moved convincingly below the January 28^th lows and is threatening the 127.2% Fibonacci extension from those lows to the highs from February 10^th, near 1.1020.  Horizontal support from April 2020 also sits that that level. Below there is the bottom trendline of the long-term channel near 1.0950, then the 161.8% Fibonacci retracement from the recently mentioned timeframe near 1.0890.

Source: Tradingview, Stone X

However, EUR/USD is trading in a descending wedge.  Expectations are that price will break out to the upside of the wedge.  The target is a 100% retracement of the wedge. In addition, the RSI is diverging with price, an indication that EUR/USD may move higher.  Resistance is at the previous support level of 1.1121, then the top trendline of the long-term channel (near the highs of the wedge) near 1.1250.  Horizontal resistance sits just above there at 1.1280.

CPI out of the Eurozone was high and the Russia/Ukraine conflict should only make it increase due to soaring energy costs. Traders need to consider whether this will be enough for the ECB to make changes to their asset purchase plan when then meet next week.