EUR/USD Forex Forecast – Lower as Headline Inflation Softens While ECB Signals More Rate Hikes

The Euro is falling against a strengthening U.S. Dollar on Thursday, after posting its largest one-day gain in a month the previous session. Softer Euro Zone inflation may be encouraging investors to book profits even as the European Central Bank (ECB) signals the need for more rate hikes.

At 10:55 GMT, the EUR/USD is trading 1.0620, down 0.0050 or -0.46%. On Wednesday, the Invesco CurrencyShares Euro Trust ETF (FXE) settled at $98.39, up $0.82 or +0.84%.

Wednesday’s Rally Fueled by Hotter-than-Expected Inflation

The Euro rose 0.9% on the dollar on Wednesday, marking its biggest daily jump in a month, following hotter-than-expected German inflation in February that added to pressure on the European Central Bank to raise rates after unexpectedly strong readings in France and Spain.

Euro Zone Headline Inflation Softens but Core Inflation Surges

Headline inflation from the Euro Zone came in at 8.5% in February, according to preliminary data released Thursday. This indicates that prices are not coming down at a pace that had been registered in recent months. Headline inflation was as high as 10.6% in October. Analysts were looking for a reading of 8.2%.

Core inflation picked up to an estimated 5.6% in February, from 5.3% in January.

ECB President Issues Warning about Inflation

ECB President Christine Lagarde said Thursday that bringing down inflation will still take time, according to comments reported by Reuters. The bank targets a headline rate of 2%. She also added that further rate hikes are “possible” after March, depending on the incoming data.

At this point in time, it’s possible that we will continue on this path (after March),” Lagarde told Spanish TV channel Antena 3. “The real, honest answer is that it will depend on the data.”

Meanwhile, analysts at Goldman Sachs said earlier this week that they were raising rate hike expectations for the ECB and pricing in another 50 basis points hike in May.

Daily EUR/USD Technical Analysis

The main trend is down according to the daily swing chart. However, momentum is trending higher.

A trade through 1.0533 will signal a resumption of the downtrend. A move through 1.1033 will change the main trend to up.

The minor trend is up. This is controlling the momentum. A trade through 1.0705 will reaffirm the uptrend. A trade through 1.0566 will change the minor trend to down, shifting momentum lower.

Support is a minor pivot at 1.0613. Resistance is a long-term 50% level at 1.0661.

Daily EUR/USD Technical Forecast

Trader reaction to the minor pivot at 1.0613 is likely to determine the direction of the EUR/USD on Thursday.

Bearish Scenario

A sustained move under 1.0613 will indicate the presence of sellers. The first downside target is a minor bottom at 1.0566. Taking out this level will increase the selling momentum with 1.0533 the next target, followed by the Jan. 6 main bottom at 1.0483.

Bullish Scenario

A sustained move over 1.0613 will signal the presence of buyers. This could trigger a surge into 1.0661. A trade through this level could create the upside momentum needed to challenge the minor top at 1.0705. This is a potential trigger point for an acceleration into a 50% level at 1.0783.