EUR/USD Has a Clear Run at $1.11 on Monetary Policy Divergence

It is a relatively busy day ahead for the EUR/USD. Finalized French and Spanish inflation numbers for March will be in focus.

However, barring downward revisions to prelim numbers, the stats should have a limited impact on the EUR/USD.

The latest round of US inflation numbers tilted monetary policy divergence toward the EUR. Euro area inflation has shown no sign of softening, with food, tobacco, & alcohol prices offsetting the pullback in energy prices.

Last Wednesday, ECB Chief Economist discussed inflation, reportedly saying,

“I look at food, where inflation pressure is probably its most intense. And it’s still rising now. I don’t think we are yet at the peak of food inflation, it’s not yet there, but again it’s projected to fall this year.”

According to prelim figures, food, alcohol, & tobacco saw the highest annual rate at 15.4% versus 15.0% in February.

While the markets are betting on the ECB raising interest rates by another 50-basis points, investors are betting on a 25-basis point Fed interest rate hike and a possible end to the Fed monetary policy tightening cycle.

Beyond the economic calendar, investors should continue to monitor IMF/World Bank Spring Meeting chatter. ECB President Christine Lagarde will participate.

EUR/USD Price Action

This morning, the EUR/USD was up 0.19% to $1.10672. A bullish start to the day saw the EUR/USD rise from an early low of $1.10446 to a high of $1.10752.

Technical Indicators

The EUR/USD needs to avoid the $1.1030 pivot to target the First Major Resistance Level (R1) at $1.1084. A move through the morning high of $1.10752 would signal a bullish session. However, the EUR/USD needs weak US retail sales numbers to support a breakout session.

In the case of another extended rally, the bulls will likely test the Second Major Resistance Level (R2) at $1.1121 and resistance at $1.1150. The Third Major Resistance Level (R3) sits at $1.1212.

A fall through the pivot would bring the First Major Support Level (S1) at $1.0993 into play. However, barring a data-fueled sell-off, the EUR/USD pair should avoid sub-$1.0950 and the Second Major Support Level (S2) at $1.0939. The Third Major Support Level (S3) sits at $1.0848.

Looking at the EMAs and the 4-hourly chart, the EMAs send bullish signals. The EUR/USD sits above the 50-day EMA ($1.09373). The 50-day EMA pulled further away from the 100-day EMA, with the 100-day EMA widening from the 200-day EMA, delivering bullish signals.

A hold above the Major Support Levels and the 50-day EMA ($1.09373) would support a breakout from R1 ($1.1084) to give the bulls a run at R2 ($1.1121) and $1.1150. However, a fall through S1 ($1.0993) would bring S2 ($1.0939) and the 50-day EMA ($1.09373) into view. A fall through the 50-day EMA would send a bearish signal.

The US Session

Looking ahead to the US session, it is another busy day on the US economic calendar.

US retail sales, industrial production, and Michigan Consumer Sentiment figures will move the dial. With investors mindful of the mild recession warning, a slump in consumer sentiment and weaker-than-expected retail sales figures could further pressure the US dollar.

Investors should also monitor Fed chatter on monetary policy and the US economy. FOMC member Waller will speak today.