Markets are expecting inflation to tick back higher in the Europe’s largest economy.
The world’s most-traded FX pair has managed to shrug off the threat to the Putin regime over the weekend.
While keeping a wary eye over potential developments in Russia, it’s back to the usual grind of watching the incoming inflation data, and interpreting what the CPI numbers could mean for the European Central Bank’s (ECB) next moves on interest rates.
Here’s are two main factors to look out for this week:
Firstly, note that traders and investors tend to boost the currency of the central bank that appears to have more rate hikes in store (hawkish).
That’s what markets will be thinking about, as Fed Chair Jerome Powell and ECB President Christine Lagarde are set to offer public comments between Tuesday, June 27th and Wednesday, June 28th.
What markets currently think the Fed will do next?
Markets are only pricing in just one more 25-basis point hike out of the US Federal Reserve for the rest of 2023.
Yet, Fed Chair Jerome Powell has been trying to convince markets since the FOMC meeting earlier this month that the Fed may have 2 more rate hikes this year.
Except that, markets just aren’t buying it.
What markets currently think the European Central Bank (ECB) will do?
Markets expect the ECB to trigger two more 25-bps hikes (50-bps in total) before the year is over.
Hence, no surprise that EURUSD has climbed by about 2% so far this month.
Potential Scenarios:
Thursday, June 29th: Germany June CPI (consumer price index, which is used to measure headline inflation)
Markets are expecting inflation to tick back higher in the Europe’s largest economy:
Friday, June 30th: Eurozone June CPI
Here are the market’s forecasts:
Overall, signs of still stubborn inflation may ramp up market bets for more ECB rate hikes.
The prospects of more rate hikes in an economy tend to strengthen its currency.
Potential Scenarios:
So far in 2023, EURUSD has seen an average intraday move of 80 pips between any given day’s highest price and that same day’s lowest.
However, on the days that Germany or Europe releases their respective CPI data, EURUSD tends to see an average intraday move of 110 pips, which is about 38% (or 30 pips) more than the daily average so far this year.
In other words, expect greater EURUSD volatility when Germany and the Eurozone release their respective CPI prints later this week.
Note also that EURUSD has posted larger intraday moves in 3 out of the past four CPI releases for Germany and the Eurozone:
Potential Support
Potential Resistance
Bloomberg’s FX model now points to a 74% chance that EURUSD will trade within the 1.0784 – 1.1010 range in the next one week.
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Lukman Otunuga is a research analyst at FXTM. A keen follower of macroeconomic events, with a strong professional and academic background in finance, Lukman is well versed in the various factors affecting the currency and commodity markets.