EURUSD Reversal Signs

EUR Slides on CPI DropA slew of weaker-than-forecast eurozone inflation data this week has put an end to the rally for now. With Spanish, German and overall eurozone CPI seen falling again last month, the market has now moved to fully price in an ECB rate cut by April next year with odds for a March cut reflecting a high degree of risk that the bank moves early on easing monetary policy.Market Calling ECB‘s BluffThe ECB has consistently pushed back against those calling on a rate cut early next year, citing remaining inflation risks. However, judging by money market movements it seems that traders are calling the bank’s bluff and perhaps reading its insistence on keeping rates higher as a means of warding off a depreciation of the euro which might then feed into higher inflation.Weekly Price ActionStill, EUR now looks poised for a move lower. Looking at the price action on the weekly chart in EURUSD suggests that the pair is at risk of a heavy correction lower. Following a strong rally over October and November which saw the pair trading up to 1.10 from 1.05, the move has now stalled and we are seeing a large bearish reversal candle on the weekly chart set against the 1.0937 resistance level.   USD in FocusThe scale of the move in EURUSD will of course depend largely on developments within the USD landscape. With the market repricing its outlook on the Fed, USD has weakened heavily over recent weeks. However, there are still risks of an uptick in USD if we see any stalling in the US deflationary trend. If the upcoming US CPI report comes in above expectations this might prove to be the catalyst for a near-term move lower in EURUSD.Technical ViewsEURUSDThe rally in EURUSD has stalled into the 1.0937 for now with price currently posting a large reversal candle. If we do move lower from here, 1.0785 will be the key support to watch and is a major pivot for the market. A break below there will be firmly bearish medium-term. While that level holds, however, a further leg higher is still feasible with 1.1126 the next bull target.