EUR/USD: Inflation data creates make-or-break moment for common currency

EUR/USD faces a stern test in the days ahead, battling divergent fundamentals, increasing risk aversion and a technical backdrop that’s as bearish as any in the G10 FX universe right now.

EUR/USD among the ugliest charts in the G10 FX universe

The daily chart doesn’t make for pleasant viewing for EUR bulls with the pair talking out support level after support level during the past few months, leaving it perilously close to fresh year-to-date lows. While RSI is oversold near-term, both the indicator and price action leave little doubt that downward momentum remains in the ascendancy. Throw in a looming ‘death cross’, with the 50-day MA about to cross the 200-day equivalent from above, and the technical picture looks troubling for bulls.

Running into the lower rung of the downtrend it’s been stuck in since July, and holding just above its year-to-date low around 1.0480, the bears will be licking their lips. With major data from the continent and US arriving in the coming days, it really does loom as a make-or-break moment for the common currency.

ECB has made data from the continent redundant near-term

While German and Eurozone consumer price inflation (CPI) top the agenda domestically, the ECB shot itself in the foot earlier this month by flagging the governing council, as a majority view, believe it’s delivered enough tightening to bring inflation back to its 2% mandate, diminishing the importance of the data on future policy decisions in the near-term. It would hammer the ECB’s already damaged credibility to backflip so quickly, meaning it’s up to the US data – specifically PCE inflation and initial jobless claims – to likely determine the fate of the EUR heading into year-end.

Up to the US data to confirm higher for longer rates argument

The fundamental scenario is not complicated with the data having to confirm or bolster the argument from the Federal Reserve that rates may have to be increased again this year and may need to be reduced at a slower pace whenever the subsequent easing cycle begins. If it does, it will be hard to bet against the USD, even with the run it’s already had. If it doesn’t, it may provide the catalyst to offer near-term support for EUR/USD.

While most attention will be on the Fed’s preferred core PCE deflator measure of inflation, don’t for get to watch the detail in the separate readings on incomes and expenditure given the implication for the inflation outlook.

Two trade ideas for EUR/USD

If the EURUSD manages to hold above 1.4080 prior to the data being released, a strong result could easily see the pair break lower, targeting support zones located around 1.0360, 1.0200 and again at 1.0090. Should a downside break occur, a stop-loss above 1.04080 or 1.0530 – depending on your downside target -- should offer protection against a sudden reversal.

Alternatively, a weak result may help EUR/USD to squeeze higher to 1.0530 or potentially 1.0640. In that scenario, a stop-loss below 1.0480 would offer protection against a resumption of the prevailing long term trend.

-- Written by David Scutt

Follow David on Twitter @scutty