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Euro Sinks Post-ECB, US Inflation Data a Key Risk for EUR/USD. What to Expect?

Euro Sinks Post-ECB, US Inflation Data a Key Risk for EUR/USD. What to Expect?

Diego Colman, Market Analyst

EURO FORECAST:

  • Euro slides on Thursday after the European Central Bank monetary policy decision disappoints hawkish expectations
  • ECB flags 25 bps July hike and leaves door open to larger increases in September, but President Lagarde fails to commit to a front-loaded tightening cycle during the press conference
  • EUR/USD could accelerate losses if May U.S. inflation data surprises to the upside

Most Read: US Dollar Price Action Setups pre-CPI - EUR/USD, GBP/USD and USD/JPY

The European Central Bank released its June monetary policy decision today, but the details were mostly unimpressive, leading to a sharp drop in the euro against the dollar, despite an initial positive reaction. In New York afternoon, EUR/USD was down 0.6% to 1.6050, after rising more than 0.2% in the early trade.

In terms of actions, the institution led by Christine Lagarde revealed that it would end net asset purchases (APP) on July 1, but the measure had been telegraphed well in advance, so it came as a surprise to no one.

Second, the ECB kept its key interest rates unchanged, but indicated that it intends to raise them by 25 basis points at its meeting next month. Hawks, who were expecting a large hike at liftoff, were dismayed by this guidance, but not entirely disappointed after the bank left the door open to a front-loaded policy response in September should the inflation outlook worsen.

The euro initially advanced after the ECB announcement crossed the wires, but then reversed lower during President Lagarde’s press conference. Lagarde failed to commit to pre-set tightening course, advocating for complete flexibility and optionality, a sign that policymakers may not be fully sold on the idea of aggressive adjustments in the fall or later, amid growing fragmentation headwinds and rapidly slowing economic growth (reflected in new macro projections).

Looking ahead, the balance of risks appears tilted to the downside for EUR/USD, with a high-impact event on the U.S. calendar on Friday: the latest U.S. consumer price index report.

The U.S. Bureau of Economic Analysis will release tomorrow inflation data for last month. May’s CPI is forecast to rise 0.7% m-o-m and 8.2% y-o-y. Meanwhile, the core gauge, which excludes volatile components, is seen climbing 0.5% m-o-m and 5.9% y-o-y.

Both indicators are expected to decline slightly on an annual basis compared to April's readings, but the directional improvement will be negligible, especially for the headline index due to soaring energy and food costs. However, if the results surprise to the upside by a wide margin, U.S. Treasury yields could reprice sharply higher in the coming days and weeks on bets that the Fed will continue to raise rates in 50 basis point increments beyond July, bolstering the U.S. dollar against the euro.

EUR/USD TECHNICAL ANALYSIS

EUR/USD attempted to rally on Thursday, but was once again repelled by cluster resistance in the 1.0735/1.0786 area. Following this rejection, the pair fell abruptly towards critical support, ranging from 1.0650 to 1.6030. Should this floor be breached in the coming sessions, sellers could become emboldened to launch an attack on the psychological 1.0500 handle, followed by the May low near 1.0350.

On the flip side, if dip buyers return and manage to spark a bullish reversal from current levels, initial resistance appears at 1.0735/1.0786. If we see a decisive move above this barrier, upside pressure could pick up pace, pushing the EUR/USD towards the next ceiling around 1.0922, defined by the 50% Fibonacci retracement of the 2022 decline.

EUR/USD TECHNICAL CHART

Euro Sinks Post-ECB, US Inflation Data a Key Risk for EUR/USD. What to Expect?

EUR/USD Chart Prepared Using TradingView

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---Written by Diego Colman, Market Strategist for DailyFX

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

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