EUR/USD rebound susceptible to slowdown in EZ CPI

EUR/USD Outlook

EUR/USD approaches the 50-Day SMA (1.0725) as it extends the rebound from the February low (1.0533), but a slowdown in the Euro Area’s Consumer Price Index (CPI) may drag on the exchange rate as it encourages the European Central Bank (ECB) to winddown its hiking-cycle.

EUR/USD rebound susceptible to slowdown in EZ CPI

The decline from the yearly high (1.0940) seems to have run its course as the Relative Strength Index (RSI) reverses ahead of oversold territory, and EUR/USD may continue to trade to fresh weekly highs as the bearish momentum abates.

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However, the update to the Euro-Area CPI may generate a bearish reaction in EUR/USD as the headline reading for inflation is expected to narrow to 8.2% from 8.6% per annum in January, and evidence of easing price pressures may push the ECB to adjust the forward guidance for monetary policy as board member Philip Lane acknowledges that the ‘improvement in the energy price situation will in the near term lower inflation.’

In turn, the Euro may face headwinds ahead of the next ECB meeting on March 16 even though the Governing Council is widely anticipated to implement another 50bp rate hike, but stickiness in underlying inflation may force the central bank to pursue a more restrictive policy as President Christine Lagarde insists that ‘we will do more hikes if necessary.’

With that said, a stronger-than-expected CPI print may fuel the recent rebound in EUR/USD as it fuels speculation for higher interest rates in the Euro Area, but the exchange rate may struggle to retain the rebound from the February low (1.0533) if it fails to push back above the 50-Day SMA (1.0725).

Euro Price Chart – EUR/USD Daily

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

• EUR/USD approaches the 50-Day SMA (1.0725) as it bounces back ahead of the January low (1.0483), and the exchange rate may attempt to trade back above the moving average as the Relative Strength Index (RSI) continues to move away from oversold territory.
• A move above the moving average opens up the 1.0880 (23.6% Fibonacci extension) to 1.0940 (50% Fibonacci retracement) region, but EUR/USD may struggle to retain the rebound from the February low (1.0533) as the indicator no longer reflects a positive slope.
• Failure to hold above 1.0610 (38.2% Fibonacci retracement) may spur another run at the January low (1.0483), with the next area of interest coming in around 1.0370 (38.2% Fibonacci extension).

--- Written by David Song, Strategist

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