EUR/USD analysis: US CPI provides dollar fresh impetus – for now

• EUR/USD analysis: CPI hotter, but not a game-changer
• US CPI steady at 3.7% y/y, a touch stronger than expected
• EUR/USD technical analysis: May’s low at 1.0635 remains most important short-term level

The EUR/USD shed more than 85 pips from the day’s high as the selling accelerated when US CPI data was released. But at the time of writing, it was testing potential support around 1.0550 area. While the slightly stronger US CPI data has given fresh life to the dollar’s bullish trend, inflation was not too hot to be a game-changer. So, watch out for potential post-CPI weakness to creep back into the US dollar, which could help provide support for currency pairs like the EUR/USD.

EUR/USD analysis: CPI hotter, but not a game-changer

Today’s US economic data didn’t disappoint the dollar bulls, as the greenback rallied across the board. However, they may still get disappointed by the dollar once the dust settles.

Ahead of the US CPI today, we had seen the dollar weaken, while government bonds, gold and equity indices had all gained ground. But once the data came out, all these markets fell and the dollar jumped across the board, along with bond yields.

In my opinion, the CPI data is not going to be a game changer, insofar as the Fed is concerned. If you look past the headlines, inflation was not too alarming in September. Annual Core CPI was in line at 4.1% y/y or 0.3% month-over-month. What’s more, if you exclude shelter, this measure of inflation rose just by 0.1% month-on-month, which isn’t nearly as frightening as the headline 0.3% rise.

So, I doubt today’s CPI will move the needle in as far as November is concerned, meaning the Fed is likely to remain on pause. In fact, inflation could decline more rapidly in the months ahead as the impact of weaker economic growth and the Fed’s past rate hikes filters through.

The trouble for foreign currencies is that decline in economic activity have been more severe in economic regions like the Eurozone and UK, than the US. This is why the dollar has remained fairly resilient, with investors reluctant to buy the euro or the pound, or the Aussie for that matter. But that could change, so be on the watch out for a potential bounce in major currency pairs like the EUR/USD and AUD/USD.

US data recap

• CPI 0.4% M/M, EXP. 0.3%; 3.7% Y/Y, EXP. 3.6%,
• CPI CORE 0.3% M/M, EXP. 0.3%; 4.1% Y/Y, EXP. 4.1%
• JOBLESS CLAIMS RISE 209K, EXP. 210K

EUR/USD technical analysis

Source: TradingView.com

As we had highlighted previously, the EUR/USD needed to back above 1.0635 (i.e., the low it had hit in May, before breaking it in September) to tip the balance in the bulls’ favour. We needed to see some confirmation that the recent recovery had some conviction behind it. On the evidence of today’s price action, well there was no commitment from the bulls. The EUR/USD merely rose a few pips above that 1.0635 level, before plunging to 1.0550, where it was trading at the time of writing. This means that the prior support has indeed turned into resistance, with the bearish trend line, which also happens to converge around that 1.0635 level, remaining in place for now.

The EUR/USD therefore remains inside its larger bearish trend. The bulls will now need to see a new solid bullish signal to tip the balance back in their favour. For me, a closing break above that 1.0635/40 level would be the confirmation. Let’s see if the EUR/USD will manage to hold its own around 1.0550 support and recover again as we head deeper into the US session. Wednesday’s low at 1.0581 is now the first trouble area on the upside.

EUR/USD analysis video from earlier in the week

In case you missed it, in the video, below we had highlighted the importance of the abovementioned levels. The EUR/USD is now back below last week's high at 1.06. The bulls need to reclaim this level if they want to arrest the bearish trend:

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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