EUR/USD to Target $1.10 on Lingering Core Inflation and ECB Chat

It is a busy day ahead for the EUR/USD. Finalized euro area inflation figures for March will draw interest later this morning.

After softer inflation numbers from France, Germany, and Italy, investors will expect a similar trend. However, the core inflation numbers should have more significance.

On Friday, ECB Executive Board Member Pierre Wunsch discussed inflation and monetary policy, saying,

“I think May will be about 25 or 50 basis points. If there’s another upside surprise in core inflation and the lending survey doesn’t look too bad, we might have to do 50. If there is a positive surprise in core, then perhaps 25 is more appropriate.”

Wunsch added,

“Given that wage dynamics will be incompatible with the 2% inflation target for years and real rates are still low, I don’t see any quick reversal of policy once we reach the terminal rate.”

Elevated core inflation figures would support a 50-basis point ECB interest rate hike in May and tilt the monetary policy divergence scales in favor of the EUR.

Investors should monitor ECB commentary today, with euro area inflation in the spotlight. ECB Chief Economist Philip Lane and ECB Executive Board member Isabel Schnabel are on the calendar to deliver speeches today.

In early April, 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.

Comments relating to the euro area CPI report and ECB monetary policy will move the dial.

EUR/USD Price Action

This morning, the EUR/USD was up 0.02% to $1.09730. A mixed start to the day saw the EUR/USD fall to an early low of $1.09646 before rising to a high of $1.09840.

Technical Indicators

Resistance & Support Levels

The EUR/USD needs to avoid the $1.0958 pivot to target the First Major Resistance Level (R1) at $1.0996. A move through the Tuesday high of $1.09829 would signal a bullish session. However, the EUR/USD needs positive euro area economic indicators and hawkish ECB chatter to support a breakout session.

In the case of an extended rally, the bulls will likely test the Second Major Resistance Level (R2) at $1.1020. The Third Major Resistance Level (R3) sits at $1.1083.

A fall through the pivot would bring the First Major Support Level (S1) at $1.0933 into play. However, barring a data-fueled sell-off, the EUR/USD pair should avoid sub-$1.09 and the Second Major Support Level (S2) at $1.0896. The Third Major Support Level (S3) sits at $1.0834.

Looking at the EMAs and the 4-hourly chart, the EMAs send bullish signals. The EUR/USD sits above the 50-day EMA ($1.09530). The 50-day EMA pulled away from the 100-day EMA, with the 100-day EMA widening from the 200-day EMA, delivering bullish signals.

A hold above the 50-day EMA ($1.09530) would support a breakout from R1 ($1.0996) to give the bulls a run at R2 ($1.1020). However, a fall through the 50-day EMA ($1.09530) would bring S1 ($1.0933) and the 100-day EMA ($1.09091) 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 a quiet day on the US economic calendar. There are no US economic indicators to influence. The lack of stats will leave Fed chatter on monetary policy and the US economy to move the dial.

We expect increased sensitivity to FOMC member commentary as the markets respond to guidance beyond May.