Euro Recovery Seems Increasingly Possible, Euro-zone CPI Expected to Fall to Nearly 10-Year Next Week

The euro has been consolidating within a falling wedge formation, with support now looming at 1.2750. This is lower than the levels noted in previous day as support comes in the form of a falling trendline. With falling wedge formations typically signaling bullish reversals, the latest consolidation may warrant the consideration of buying EUR/USD. The one major piece of event risk for the euro next week comes on January 30, as Eurostat estimates for Euro-zone CPI are projected to show at 5:00 ET that inflation growth eased to a nearly 10-year low of 1.4 percent in January from 1.6 percent. Given European Central Bank President (ECB) Jean-Claude Trichet’s more bearish stance on economic growth and the bank’s total of 225 basis points worth of rate cuts since October, a weaker-than-expected CPI reading could exacerbate the market’s speculation that the central bank will cut rates again on February 5, and weigh on the euro. On the other hand, if CPI does not fall further, the currency could gain as the markets assume the central bank will leave rates unchanged next month and wait until March to make monetary policy more accommodative.