EUR/USD Rally Pauses Ahead of US Consumer Inflation Report

Key Takeaways

• EUR/USD steady amid concerns over high CPI and possible ECB rate hike.
• CPI likely increased by 0.4% last month, lowering year-on-year increase to 6.0%.
• CPI excluding food and energy components forecast to increase 0.4% for a third straight month.

Market Overview

The Euro is lower against the U.S. Dollar on Tuesday, but not far from Monday’s one-month high as traders square positions ahead of today’s U.S. consumer inflation report, due to be released at 12:30 GMT.

Prices rose sharply the previous session as expectations grew that the Federal Reserve could pause its rate hikes after the collapse of two big U.S. regional banks.

At 09:19 GMT, the EUR/USD is trading 1.0702, down 0.0030 or -0.28%. On Monday, the Invesco CurrencyShares Euro Trust ETF (FXE) settled at $99.04, up $0.88 or +0.90%.

Current Rally Fueled by Tumbling US Treasury Yields

The rally in the EUR/USD picked up steam on Monday as investors swarmed into U.S. government bonds after the collapse of Silicon Valley Bank and subsequent government backstop of the banking system.

The flight-to-safety move sent the yield on the 2-year Treasury to 4.005%, down nearly 59 basis points. The yield has fallen around 100 basis points, or a full percentage point, since last Wednesday, marking the largest three-day decline since Oct. 22, 1987, when the yield fell 117 basis points.

Fed May Pause Rate Hikes, While ECB Could Hike 50 Basis Points on Thursday

Complicating matters for EUR/USD traders is the possibility the Fed votes at next week’s meeting to pause its rate hiking campaign. Meanwhile, the market has priced in a 50 basis point rate hike by the European Central Bank (ECB).

The notion of a divergence in monetary policy between the Fed and the ECB is making the Euro a more attractive investment than the U.S. Dollar at this time.

Trader Bracing for Strong US Consumer Inflation Report

The Consumer Price Index (CPI) likely increased by 0.4% last month after accelerating 0.5% in January, according to a Reuters survey of economists. That would lower the year-on-year increase in the CPI to 6.0% in February.

Excluding the volatile food and energy components, the CPI is forecast to have increased 0.4% for a third straight month.

Daily EUR/USD Technical Analysis

The main trend is up according to the daily swing chart. A trade through 1.0749 will signal a resumption of the uptrend. A move through 1.0524 will change the main trend to down.

The minor trend is also up. Taking out 1.0804 will reaffirm the trend.

Support is a long-term 50% level at 1.0661, followed by a short-term retracement zone at 1.0637 to 1.0610.

The closest resistance is a 50% level at 1.0783.

Daily EUR/USD Technical Forecast

Trader reaction to 1.0700 is likely to determine the direction of the EUR/USD on Tuesday.

Bullish Scenario

A sustained move over 1.0700 will indicate the presence of buyers. If this creates enough upside momentum then look for the rally to extend into 1.0783, followed by 1.0804. The latter is a potential trigger point for an acceleration to the upside with 1.0943 the next likely target price.

Bearish Scenario

A sustained move under 1.0700 will signal the presence of sellers. This could lead to a labored break with potential downside targets coming in at 1.0661, 1.0637 and 1.0610.

The latter is a potential trigger point for an acceleration into 1.0524.