EUR/USD News and Analysis
- German inflation as expected, ECB members Knot and Lagarde talk about QT
- German inflation does little to move markets but US CPI is likely to see a return to FX volatility
- Main risk events: US CPI, US retail sales and Uni of Michigan consumer sentiment
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ECB Members Talk about QT Ahead of this Month’s Rates Meeting
The European Central Bank’s Klaas Knot mentioned yesterday that the euro zone will need to hike into restrictive territory as it remains behind the US in terms of the projected terminal rate. He went on to say that a few more aggressive rate hikes are needed to simply reach the neutral territory with no indications that 75 bps could not achieve the target for the upcoming meeting. Such rhetoric helps support EUR/USD ahead of the crucial CPI data later today.
Knot also mentioned that QT will need to predictable and gradual, likely in response to what we have seen in the UK bond market lately amidst concerns of contagion effects in the wider euro area. ECB President Christine Lagarde also weighed in on QT but insists that interest rates are the most “appropriate” tool right now.
German Inflation Soars but Prints in Line with Estimates
Earlier this morning German CPI (10%) and HICP (10.9%) inflation data (YoY) came out exactly as expected, resulting in little market movement in EUR/USD. Money markets currently price in 70 bps for the November meeting.
German HICP Inflation Data (10.9%)
Source: Refinitiv
EUR/USD Analysis
The EUR/USD pair continues the long-term downtrend but appears to have stalled ahead of the US CPI data this afternoon, much like other G10 currencies. The pair benefitted from the BoE intervention announced on September the 28th, stabilizing market confidence in the UK, with the effects also helping the euro.
EUR/USD Daily Chart
Source: TradingView, prepared by Richard Snow
Markets have shown to be extremely short-sighted when it comes to highly important US inflation data. The most recent example of this was last month’s CPI print which resulted in an instant reversal of the dollar sell-off as the theme of a “Fed pivot” gained traction leading up to the print.
It would appear that the approach to the September figure is more cautious as the dollar (DXY) is rather elevated despite colling off yesterday and today, thus far.
Follow our live coverage and commentary around the US CPI release at 12:15 PM GMT
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US CPI and arguably more importantly, core CPI is likely to influence short-term direction where higher prints boost USD valuations and a lower print may reignite bets around the “Fed pivot”, supporting a relief rally in USD crosses.
Looking at the 4-hour EUR/USD chart, price action has largely remained within a confined zone (purple), consolidating around the upper-side of the 0.9615-0.9700 zone of support. A lower than expected print may see a bounce higher from current levels towards the recent spike high of 0.9775 and possibly even the 78.6% Fib and psychological level of 0.9900.
However, another print inline or above estimates reinforces the stubbornness of inflation and a continued message of aggressive rate hikes, supporting dollar appreciation (lower EUR/USD). A break below 0.9615 exposes the pair to a possible return to the September 28 low of 0.9666 and any further bearish momentum could see a retest of the descending trendline acting as long-term support.
EUR/USD 4-Hour Chart
Source: TradingView, prepared by Richard Snow
Risk Events on the Horizon
As mentioned above, the US CPI is the most significant risk event this week on paper. Tomorrow, we have US retail sales and the University of Michigan consumer sentiment report, which has been steadily climbing but remains of interest in the wake of OPEC’s recent output cuts which the IEA said threatens to push the global economy into a recession. Higher anticipated fuel costs could factor into the report with a potentially lower reading but that remains to be seen.
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— Written by Richard Snow for DailyFX.com
Contact and follow Richard on Twitter: @RichardSnowFX
