Euro Outlook: EUR/USD at Risk of Falling Below 1.17, Focus on US CPI

Key Talking Points:

• EUR/USD testing 1.17 for the second time this year
• US CPI could be a market-mover as analysts expect the July reading to be a little softer

EUR/USD is sitting just above its 2021 low as the US Dollar starts the day a touch higher. The move so far has been pretty light compared to previous sessions but we have the US CPI data out this afternoon, and that is likely to be a market mover if the reading deviates from market expectations.

Expectations are for July CPI to soften slightly, from 5.4% to 5.3%, and core prices to fall back to 4.3%. That said, if last month’s PPI reading is anything to go by we may be in for another small rise which would see US yields and the US Dollar higher. If so, EUR/USD may be in for a drop below 1.17, which would be the lowest price since the 4th of November 2020. This could also trigger some stops which would put further bearish pressure on the pair, meaning we could see a greater pullback, even if only momentary, as I would expect the price to stabilise over the next few days.

If that is the case, I would look out for support around 1.1603, which is the low in November 2020 after the pair had already bounced off 1.17 before pulling back further. On the topside, 1.1780 is likely to show some resistance as the pair has consolidated around that area over the past few weeks.

EUR/USD Daily chart

Fundamentally, the US Dollar is brushing aside fears of the Delta variant in favor of focusing on taper expectations from the Fed, but in Europe it’s a different picture, with the ECB remaining ultra-dovish, pushing back rate hike expectations until 2024, and economic data suggesting that growth may have peaked already.

With regards to the Fed, a stronger CPI reading will add pressure to an imminent taper which is expected to be announced at the end of this month at the Jackson Hole Symposyum, which would marke the anniversary of the announcement of average inflation targetting. I would expect policy members to continue to label an increase in price pressures as transitory, but there are some elements of the CPI reading that may turn out to be more solid than expected, especially house prices, as we’ve seen evidence of a heating and tight property market.

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--- Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin