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Euro May Fall as CPI Data Sustains Dovish ECB, Dollar Eyes ISM

Euro May Fall as CPI Data Sustains Dovish ECB, Dollar Eyes ISM

Ilya Spivak, Head Strategist, APAC

EURO, CPI, ECB, US DOLLAR, ISM, FED, EUR/USD – TALKING POINTS:

  • Euro may fall as CPI data bolsters dovish ECB status quo
  • US Dollar looking for a lifeline in ISM manufacturing data
  • EUR/USD technical positioning warns of downturn ahead

The Euro may find itself on the defensive as liquidity fills back into financial markets after holiday closures in the UK and the US made for a slow start to the week on Monday. May’s flash Eurozone CPI report headlines the data docket. The core inflation rate is expected to edge up to 0.8 percent.

Price growth readings have increasingly topped baseline forecasts globally in recent months (according to data from Citigroup), and the currency bloc is no exception. That may imply that analysts’ models are broadly understating realized reflation, opening the door for an upside surprise.

The implications of any such outcome on monetary policy and thereby the Euro will probably be seen through the prism of the ECB’s emphatically dovish stance. Policymakers have made it clear that they see any rise in prices as temporary and have no appetite for stimulus withdrawal.

With this in mind, traders primed to be ready for a bubblier outcome may be relieved if anything but the most dramatic of deviations keeps the ECB outlook status quo intact. A wave of Euro selling might follow as the single currency’s place on the anti-yield side of the returns spectrum is reaffirmed anew.

BATTERED US DOLLAR LOOKS TO ISM DATA FOR A LIFELINE

Later in the day, the ISM manufacturing survey is in focus. It is seen showing that the pace of activity growth quickened in May. A timelier Markit PMI gauge of the US factory sector bolsters the case for a pickup, but also a sharp surge in cost burdens. The ISM report will be combed for signs of the same.

The survey’s prices sub-index already pointed to the fastest growth in 13 years in April. More of the same may sharpen investors’ focus on the possibility that the Fed will be pushed to rein in stimulus sooner than it has acknowledged up to now. That may offer a lift to the recently battered US Dollar.

EUR/USD TECHNICAL ANALYSIS – BEARISH REVERSAL CLUES ACCUMULATE

A growing collection of technical cues warns that EUR/USD may be topping. Recent price action is taking the shape of a typically bearish Rising Wedge formation. This is punctuated by the appearance of a Bearish Engulfing candlestick pattern as well as negative RSI divergence.

Confirmation on a daily close below resistance-turned-support at 1.2172 may open the door for a slide back below the 1.20 figure in the days and weeks to come. Alternatively, pushing above the May high at 1.2266 looks likely to expose the 2021 year-to-date high 1.2350.

Euro May Fall as CPI Data Sustains Dovish ECB, Dollar Eyes ISM

EUR/USD daily chart created withTradingView

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--- Written by Ilya Spivak, Head Strategist, APAC at DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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