Euro Forecast: EUR/USD Enclosed by Key Tech Levels Before US CPI, Breakout Eyed
- EUR/USD begins the week on the back foot, following disappointing economic data in Europe and rising U.S. Treasury yields
- Volatility, however, is limited, with many traders on the sidelines ahead of Thursday’s U.S. inflation report, which could be critical for the U.S. dollar
- This article also discusses key EUR/USD technical levels to watch in the coming sessions
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The euro was modestly softer against the U.S. dollar on Monday, pressured by rising U.S. Treasury yields and subdued sentiment following lower-than-expected industrial production figures in Germany – the country with the largest and most powerful economy in the eurozone.
In early afternoon trading, EUR/USD was down about 0.15% to 1.0990, in a context of limited and depressed FX volatility, with many traders avoiding taking large speculative positions ahead of a major risk event later in the week: the release of the latest U.S. inflation report.
July Headline CPI is expected to have risen 0.2% m/m, pushing the annual rate to 3.3% from 3.0% previously. The core indicator, which excludes energy and food, is also seen climbing 0.2% m/m, but the yearly reading is projected to cool to 4.7% from 4.8% in June - a very small improvement for the Fed.
While recent U.S. data, including the somewhat weaker-than-forecast nonfarm payrolls survey, have reduced the likelihood of further Fed tightening in the months ahead, interest rate expectations could drift higher again if the overall trend in consumer prices does not show convincing signs of moderation.
For insight into the broader market trajectory, it is important to watch the upcoming inflation numbers closely, placing more emphasis on underlying metrics. That said, any core CPI print above 4.7% should be quite bullish for the U.S. dollar, insofar as it could boost the odds of another FOMC hike later in 2023. This could mean steep losses for EUR/USD.
On the other hand, a large downside surprise in core inflation, say 4.5% or below, might trigger a dovish repricing of the Fed’s monetary policy outlook, exerting downward pressure on Treasury yields. This scenario could pave the way for a solid recovery of the euro against the greenback.
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EUR/USD TECHNICAL ANALYSIS
Focusing on price action, EUR/USD appears to be sandwiched between two key technical levels after its recent pullback: resistance at ~1.1000 and support at ~1.0925.
In terms of possible scenarios, successful clearance of the psychological 1.1000 handle could open the door for a move to 1.1090, followed by 1.1180. On further strength, the focus shifts to 1.1275, the 61.8% Fib retracement of the 2021/2022 selloff.
On the flip side, a breach of confluence support near 1.0925 could attract new sellers into the market, setting the stage for a drop toward 1.0850. On further weakness, bearish pressure could gather pace, clearing the pathway for a pullback toward the 200-day simple moving average.
EUR/USD TECHNICAL CHART
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