Market Overview

EUR/USD Forecast: Double Bottom After The Draghi Drama, Inflation Eyed

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  • The EUR/USD had a turbulent week, reaching new two-week highs only to tumble down.
  • The inflation reports from the US and then from Europe dominate the calendar. Both are not that promising. 
  • The technical picture is mixed, with the pair looking for a new direction after triggering a double bottom.

Draghi drag, trade, and Trump

Draghi delivered volatility. The European Central Bank left its policy measures unchanged as expected but made a small change to its statement. They no longer leave the door open to increasing the size of bond buys, just the duration. Alongside a minor upgrade in growth forecasts, the EUR/USD shot higher and reached the highest levels since mid-February, $1.2447.

But as the press conference continued, the ECB President clarified that the change did not reflect a new outlook, that the ECB is reactive rather than proactive and that the move only confirms previous forecasts. The EUR/USD began drifting lower and fell below $1.2300.

Another theme that is weighing on the euro is the notion that the euro-zone growth may have peaked. Disappointing PMI data and the following shortcoming of Industrial Output cause worries.

In the US, economic data was mostly positive. The US Non-Farm Payrolls showed a rise of 313,000, the best since July 2016 and coupled with upwards revisions. However, wages, which remain more significant, slowed with an increase of 0.1% MoM and 2.6% YoY. This is unlikely to deter the Fed from upgrading the dot-plot. See the full analysis.

Other figures such as the ISM PMI data and the ADP came out above forecasts. 

Trade tensions continued to dominate the headlines. Trump's tariffs initially pushed the US Dollar lower amid fears of a trade war the EU's willingness to retaliate. A small easing of tensions followed when the President made exemptions for Canada and Mexico. This will be an ongoing theme. 

The news of a breakthrough in talks between North and South Korea with a potential denuclearization of the North sent the pair higher on a risk-off atmosphere. The pair did not immediately react to the news of a summit between Trump and North Korean leader Kim Jong-un. 

Euro-zone inflation in focus

The large euro-zone countries release their inflation reports throughout the week with Germany's number coming on Wednesday, and it culminates on Friday with the all-European figures. Higher inflation is needed for the ECB to quicken the removal of stimulus, with the timing of the end of the QE program still in the air. We know that the ECB has yet to declare victory, as Draghi put it.

Also, euro-zone Industrial Output is set to be weak after the recent shortfalls. The Eurogroup meetings will be held after Germany has a new government and as Italian politics seem deadlocked after the recent elections. Any comments on further European integration will be euro positive while austerity may weigh on the common currency.

Talk of retaliation by the EU to US tariffs may also impact the euro. Worsening trade relations are not good for any side. As the EU has a trade surplus with the US, a deterioration may adversely affect the single currency.

Here are the key events in the euro-zone, as they appear on the economic calendar:

fx1_15.png

US events: inflation and the consumer

In the US, inflation takes center stage as well. The CPI report on Tuesday will garner attention as it is the last major release before the Fed decision on the following week. An upgrade of the dot-plot is on the cards, but a poor read on Core CPI (expected at 1.8%) may hurt the US Dollar, especially after the disappointing wage data. In case the annual Core CPI meets forecasts, watch out for the monthly change, followed by the headline number and the read on real wages.

The retail sales publication on Wednesday is also of high importance, and this time it is not overshadowed by the inflation data. Housing figures and the Consumer Sentiment Index by the University of Michigan on Friday may rock the US Dollar into the close. 

Here are the main American events:

fx2_9.png

EUR/USD Technical Analysis - Double bottom at the 50-day SMA

The EUR/USD technical picture is becoming more complex. The uptrend support line was lost, recaptured, and lost again. However, the 50-day Simple Moving Average still supports the pair as the chart shows. 

The RSI is reasonably balanced at around 50 while Momentum is slightly negative. All in all, the bullish move faded but that does not necessarily mean a downfall.

Support is found at $1.2270, a double bottom as seen on March 5th and March 9th. Further below, the mid-February low of $1.2205 is next. The $1.2155 level seen in early March is the last line to watch.

On the upside, $1.2360 switches positions to resistance, followed by the March 8th high of $1.2447 and then by the three-year high of $1.2555. 

fx3_6.png

Where next for EUR/USD?

The thrill is gone for the EUR/USD and not only on the charts. And it is not just the dovish twist from Draghi. There is a growing sense that the euro-zone growth momentum has peaked and this may weigh on the euro. And while US inflation is not looking great, it is hard to see the EUR/USD riding higher on it.

The FXStreet FXPoll shows a bearish sentiment on the EUR/USD, similar to this analysis.

Posted-In: FXStreetNews Eurozone Forex Markets

 

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