EUR/USD: forecast uptick in Euro Area core CPI expected

EUR/USD Outlook

EUR/USD appears to be on track to test the monthly high (1.0930) as it continues to bounce back from the 50-Day SMA (1.0731), and the update to the Euro Area’s Consumer Price Index (CPI) may fuel the recent rebound in the exchange rate as the report is anticipated to show sticky inflation.

EUR/USD forecast: uptick in Euro Area core CPI expected

EUR/USD outperforms most of its major counterparts as it continues to trade above the January low (1.0483), and the exchange rate may extend the fresh series of higher highs and lows as the European Central Bank (ECB) keeps the door open to pursue a more restrictive policy.

In a recent interview with Business Post, ECB Vice-President Luis de Guindos acknowledged that ‘headline inflation will decline quite rapidly over the next six to seven months as the base effects play in favour of a rapid reduction in inflation,’ but went onto say that the Governing Council will ‘need to look very carefully at the evolution of core inflation’ amid signs of persistent price pressures.

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As a result, market participants may pay increased attention to the Euro Area’s core CPI as the gauge is expected to uptick to 5.7% in March from 5.6% per annum the month prior, and evidence of sticky inflation may generate a bullish reaction in the Euro as it puts pressure on the ECB to implement higher interest rates.

In turn, the ECB may pursue a more restrictive policy while the Federal Reserve moves away from its hiking-cycle as Chairman Jerome Powell and Co. ‘now anticipate that some additional policy firming may be appropriate.’

With that said, speculation for a looming change in regime may produce headwinds for the Greenback ahead of the next Federal Open Market Committee (FOMC) interest rate decision on May 3, and EUR/USD may attempt to test the monthly high (1.0930) as it continues to bounce back from the 50-Day SMA (1.0731).

Euro Price Chart – EUR/USD Daily

Chart Prepared by David Song, Strategist; EUR/USD on TradingView

• EUR/USD trades back above the 50-Day SMA (1.0731) after defending the January low (1.0483), and the exchange rate may attempt to test the monthly high (1.0930) as it initiates a fresh series of higher highs and lows.
• A break/close above the 1.0880 (23.6% Fibonacci extension) to 1.0940 (50% Fibonacci retracement) region raises the scope for a run at the February high (1.1033), with the next area of interest coming in around 1.1070 (23.6% Fibonacci retracement), which largely lines up with the April 2022 high (1.1076).
• However, failure to break/close above the 1.0880 (23.6% Fibonacci extension) to 1.0940 (50% Fibonacci retracement) region may pull EUR/USD back towards the 50-Day SMA (1.0731), with a move below the moving average opening up the 1.0610 (38.2% Fibonacci retracement) area.

--- Written by David Song, Strategist

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