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Euro Talking Points

The recent rebound in EUR/USD unravels ahead of the updates to the U.S. Consumer Price Index (CPI), with the exchange rate at risk of making a run at the June-low (1.1508) as it snaps the series of higher highs & lows from earlier this week.

Image of daily change for major currencies

EUR/USD Rebound Unravels Ahead of Updates to U.S. Consumer Price Index (CPI)

Image of daily change for eurusd

The Euro is back under pressure even as the European Central Bank’s (ECB) economic bulletin highlights expectations for ‘solid and broad-based economic growth,’ and the single-currency stands at risk of facing headwinds over the remainder of the year as the Governing Council remains in no rush to move away from its easing-cycle.

Even though the quantitative easing (QE) program is set to expire in December, the ECB may keep the door open to further support the monetary union as the central bank struggles to achieve its one and only mandate for price stability. After adjusting the exit strategy in June, it seems as though President Mario Draghi & Co. will deliver additional details at the next quarterly meeting in September as the asset-purchase program gets throttled down to EUR 15B/month starting in October, but the central bank may continue to strike a dovish forward-guidance for monetary policy as officials pledge to ‘ensure the ample degree of monetary accommodation necessary for the continued sustained convergence of inflation towards levels that are below, but close to, 2% over the medium term.

Image of fed fund futures

With that said, the diverging paths for monetary policy continues to cast a long-term bearish outlook for EUR/USD especially as Fed Fund Futures continue to reflect expectations for four rate-hikes in 2018, but updates to the U.S. Consumer Price Index (CPI) may keep euro-dollar in its current range as both the headline and core rate of inflation are expected to hold steady in July.

The CPI print may do little to boost the appeal of the greenback as it curbs the risk for a prolonged period of above-target inflation, and EUR/USD may continue to consolidate ahead of the central bank meetings scheduled for next month as the exchange rate tracks the range-bound price action from June.

EUR/USD Daily Chart

Image of eurusd daily chart
  • The June-low (1.1508) sits on the radar for EUR/USD as it snaps the bullish sequence from the previous week, with the lack of momentum to push back above the 1.1640 (23.% expansion) to 1.1680 (50% retracement) region raising the risk for a further decline in the exchange rate.
  • Will keep a close eye on the lower bounds of its recent range which comes in around the1.1510 (38.2% expansion) region, but a break/close below the stated region brings the downside targets back on the radar, with the first region of interest coming in around 1.1390 (61.8% retracement) to 1.1400 (50% expansion) followed by the 1.1290 (61.8% expansion) hurdle.

For more in-depth analysis, check out the Q3 Forecast for the Euro

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.