Eurozone climbing into the higher inflation boat EURUSD

Eurozone climbing into the higher inflation boat: EUR/USD

Earlier, the Eurozone released its Producer Price Index (PPI) data for APRIL, which was 1%, vs an expectation of 0.5% and 1.1% in March. No big deal, right? Old data. But theoretically, PPI feeds in the Consumer Price Index (CPI) in subsequent months. On Tuesday, the Eurozone released its CPI data for MAY. (Why they release April PPI after May CPI, I have no idea!). May’s CPI reading was 2%. This is the highest reading since October 2018. The ECB has a target inflation of just below 2%. However, as with the US Fed, the ECB assumes the inflation is due to base effects (which is probably true, given where the economy was last year) and temporary factors (aka transitory).

What are economic indicators?

Looking further into inflation, the IHS Markit Eurozone Manufacturing PMI was also released earlier this week. The reading for May was 63.1, the highest ever. Similar to the US, which we discussed in the Currency Pair of the Week, the EU is having a big supply chain issue. As a result of increased demand and lower supply, prices are rising. The output inflation was the highest in 18 years! The ECB meets next week. Recall that at the March meeting, the ECB increased the pace of their bond buying. The question that traders will be looking for an answer to is “Will the ECB cut back on the pace of bond buying to pre-March levels, increase it to try and lower inflation, or keep it unchanged?”

Everything you need to know about the ECB

EUR/USD formed a shooting star candlestick on a daily timeframe. We discussed shooting stars in our most recent webinar on candlestick patterns and how they tend to be 1-day reversal patterns. Today, price broke lower below the bottom trendline of an ascending wedge, which was discussed in our webinar last week on Chart Patterns. Last Friday, price had a false breakout below the wedge. Can it happen twice within 4 days?

Source: Tradingview, City Index

On a 240-minute timeframe, after breaking the trendline, EUR/USD held the 38.2% Fibonacci retracement from the May 5^th lows to the May 28^th highs near 1.2159. The pair also formed a bullish candlestick formation. Typically, the longer-term daily shooting star would trump a short-term hammer. Thus far, EUR/USD is holding the upward sloping trendline. The next resistance above the near-term trendline is between 1.2245 (early Jan highs) and 1.2267 (May 25^th highs). Above there, resistance is at 1.2419, the highs from April 2018! Support below the 38.2% Fibonacci retracement is at the May 28^th lows of 1.2133 and the 50% retracement level from the same timeframe near 1.2161. Below there is the 61.8% Fibonacci retracement at 1.2093.

Source: Tradingview, City Index

With the higher inflation data from the EU, the ECB is going to have a tough decision on its hands when they meet next week. Will they reduce bond purchases, do nothing, or even increase them due to higher inflation?

Learn more about forex trading opportunities.

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. They may not be suitable for everyone. Please ensure you fully understand the risks involved by reading our full risk warning.

City Index is a trading name of StoneX Financial Ltd. Head and Registered Office: 1st Floor, Moor House, 120 London Wall, London, EC2Y 5ET. StoneX Financial Ltd is a company registered in England and Wales, number: 05616586. Authorised and regulated by the Financial Conduct Authority. FCA Register Number: 446717.

City Index is a trademark of StoneX Financial Ltd.

The information on this website is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement.