Trade of the Week: EURUSD to suffer another inflation scare?

<p><strong>By <a href="http://investmacro.com/contributors/contributor-profile-forextime/">ForexTime</a></strong></p>
<ul>
<li>Bloomberg FX model: <strong>74% chance</strong> EURUSD will trade within <strong>1.0784 &#8211; 1.1010 </strong>this week.</li>
<li>Traders to react to <strong>Powell vs. Lagarde</strong> comments due <strong>June 27-28</strong></li>
<li>EURUSD typically sees <strong>38% larger 1-day move</strong> on <strong>European CPI release days</strong></li>
</ul>
<h3></h3>
<h3><span lang="EN-US" xml:lang="EN-US">The world’s most-traded FX pair has managed to shrug off the threat to the Putin regime over the weekend.</span></h3>
<p><span lang="EN-US" xml:lang="EN-US">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.</span></p>
<p>&nbsp;</p>
<p><strong><span lang="EN-US" xml:lang="EN-US">Here’s are two main factors to look out for this week:</span></strong></p>
<p>&nbsp;</p>
<h2><span lang="EN-GB" xml:lang="EN-GB">1) Speeches by Fed and ECB chiefs</span></h2>
<p><span lang="EN-GB" xml:lang="EN-GB">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).</span></p>
<p><span lang="EN-GB" xml:lang="EN-GB">That’s what markets will be thinking about, as <strong>Fed Chair Jerome Powell </strong>and <strong>ECB President Christine Lagarde </strong>are set to offer public comments between <strong>Tuesday, June 27th and Wednesday, June 28th.</strong></span></p>
<p>&nbsp;</p>
<p><em><strong><span lang="EN-GB" xml:lang="EN-GB">What markets currently think the Fed will do next?</span></strong></em></p>
<blockquote><p><em><span lang="EN-GB" xml:lang="EN-GB">Markets are only pricing in just <strong>one more 25-basis point hike</strong> out of the US Federal Reserve for the <strong>rest of 2023.</strong></span></em></p></blockquote>
<p><span lang="EN-GB" xml:lang="EN-GB">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. </span></p>
<p><em><span lang="EN-GB" xml:lang="EN-GB">Except that, markets just aren’t buying it.</span></em></p>
<p>&nbsp;</p>
<p><em><strong><span lang="EN-GB" xml:lang="EN-GB">What markets currently think the European Central Bank (ECB) will do?</span></strong></em></p>
<blockquote><p><em><span lang="EN-GB" xml:lang="EN-GB">Markets expect the ECB to trigger <strong>two more 25-bps hikes (50-bps in total) before the year is over. </strong></span></em></p></blockquote>
<p><span lang="EN-GB" xml:lang="EN-GB">Hence, no surprise that EURUSD has climbed by about 2% so far this month.</span></p>
<p>&nbsp;</p>
<p><em><strong><span lang="EN-GB" xml:lang="EN-GB">Potential Scenarios:</span></strong></em></p>
<ul>
<li><span lang="EN-GB" xml:lang="EN-GB">Should markets finally take heed of <strong>Powell’s hawkish messaging</strong>, that could lead to a stronger US dollar that <strong>drags EURUSD lower.</strong></span></li>
<li><span lang="EN-GB" xml:lang="EN-GB">Alternatively, should <strong>Powell’s hawkish intentions</strong> be once again <strong>pooh-poohed </strong>by markets, that may <strong>push EURUSD even higher.</strong></span></li>
</ul>
<p>&nbsp;</p>
<p>&nbsp;</p>
<h2><span lang="EN-GB" xml:lang="EN-GB">2) European inflation data</span></h2>
<p><em><strong><span lang="EN-GB" xml:lang="EN-GB">Thursday, June 29th:</span></strong><span lang="EN-GB" xml:lang="EN-GB"> <strong>Germany June CPI </strong></span></em><span lang="EN-GB" xml:lang="EN-GB">(consumer price index, which is used to measure headline inflation)</span></p>
<blockquote><p><span lang="EN-GB" xml:lang="EN-GB"><em>Markets are expecting <strong>inflation to tick back higher </strong>in the Europe’s largest economy:</em></span></p></blockquote>
<ul>
<li><strong><span lang="EN-GB" xml:lang="EN-GB">Month-on-month CPI</span></strong><span lang="EN-GB" xml:lang="EN-GB"> (June 2023 vs. May 2023)</span><span lang="EN-GB" xml:lang="EN-GB"> to be<strong> 0.2%</strong> higher; inflation back to positive growth after May’s 0.1% month-on-month contraction)</span></li>
<li><strong><span lang="EN-GB" xml:lang="EN-GB">Year-on-year CPI</span></strong><span lang="EN-GB" xml:lang="EN-GB"> (June 2023 vs. June 2022) to be <strong>6.3%</strong> higher.<br />
If so, that would mean inflation is ticking back up at a faster pace compared to May 2023’s 6.1% year-on-year number.</span></li>
</ul>
<p>&nbsp;</p>
<p><em><strong><span lang="EN-GB" xml:lang="EN-GB">Friday, June 30th: Eurozone June CPI</span></strong></em></p>
<p><span lang="EN-GB" xml:lang="EN-GB">Here are the market’s forecasts:</span></p>
<ul>
<li><strong><span lang="EN-GB" xml:lang="EN-GB">Month-on-month CPI</span></strong><span lang="EN-GB" xml:lang="EN-GB"> (June 2023 vs. May 2023) to be <strong>0.3% higher</strong>; inflation back to growth after May’s 0.0% month-on-month reading.</span></li>
<li><strong><span lang="EN-GB" xml:lang="EN-GB">Year-on-year CPI</span></strong><span lang="EN-GB" xml:lang="EN-GB"> (June 2023 vs. June 2022) to be<strong> 5.6% higher</strong>; a slower annual pace compared to May’s 6.1% year-on-year advance</span></li>
<li><strong><span lang="EN-GB" xml:lang="EN-GB">Core CPI</span></strong><span lang="EN-GB" xml:lang="EN-GB"> (excluding more volatile items such as food and fuel) to be <strong>5.5% higher year-on-year</strong> (June 2023 vs. June 2022).<br />
If so, that would mean inflation is ticking back up at a faster pace compared to May 2023’s core CPI year-on-year number of 5.3%.</span></li>
</ul>
<p><span lang="EN-US" xml:lang="EN-US">Overall, signs of still stubborn inflation may ramp up market bets for more ECB rate hikes.</span></p>
<p><span lang="EN-US" xml:lang="EN-US">The prospects of more rate hikes in an economy tend to strengthen its currency.</span></p>
<p>&nbsp;</p>
<p><strong><span lang="EN-GB" xml:lang="EN-GB"><em>Potential Scenarios:</em></span></strong></p>
<ul>
<li><span lang="EN-US" xml:lang="EN-US">H<strong>igher-than-expected CPI prints</strong> out of Germany/Eurozone later this week may translate into a <strong>stronger Euro versus the US dollar.</strong></span></li>
<li><span lang="EN-US" xml:lang="EN-US">Alternatively, <strong>lower-than-expected CPI</strong> prints out of Germany/Eurozone later this week may translate into a <strong>weaker EURUSD.</strong></span></li>
</ul>
<p>&nbsp;</p>
<p>&nbsp;</p>
<h3><strong><span lang="EN-US" xml:lang="EN-US">EURUSD tends to post larger-than-average moves on CPI data</span></strong></h3>
<p><span lang="EN-US" xml:lang="EN-US">So far in 2023, <strong>EURUSD </strong>has seen an <strong>average intraday move of 80 pips</strong> between any given day’s highest price and that same day’s lowest.</span></p>
<p><span lang="EN-US" xml:lang="EN-US">However, on the days that <strong>Germany or Europe releases their respective CPI</strong> data, EURUSD tends to see an<strong> average intraday move of 110 pips,</strong> which is about 38% (or 30 pips) more than the daily average so far this year.</span></p>
<blockquote><p><em><span lang="EN-US" xml:lang="EN-US">In other words, <strong>expect greater EURUSD volatility</strong> when Germany and the Eurozone release their respective CPI prints later this week.</span></em></p></blockquote>
<p>&nbsp;</p>
<p><span lang="EN-US" xml:lang="EN-US">Note also that<strong> EURUSD has posted larger intraday moves in 3 out of the past four of Germany&#8217;s CPI releases</strong>, compared to EURUSD&#8217;s 1-day move on the day of the Eurozone&#8217;s CPI release.</span></p>
<p><span lang="EN-US" xml:lang="EN-US">After all, Germany is the largest economy in Europe. Hence, the former&#8217;s CPI print is seen as a forerunner to the bloc&#8217;s headline CPI print.</span></p>
<p><img decoding="async" loading="lazy" class=" lazyloaded" src="https://www.forextime.com/s3-static/users/user16/EURUSD%20intraday%20GE%20CPI%20vs%20EC%20CPI.png" alt="" width="1024" height="768" data-entity-type="file" data-entity-uuid="97d34149-1b14-44aa-ba60-d9b458d6b852" data-src="/s3-static/users/user16/EURUSD%20intraday%20GE%20CPI%20vs%20EC%20CPI.png" /></p>
<p>&nbsp;</p>
<p>&nbsp;</p>
<h2><span lang="EN-US" xml:lang="EN-US">Key levels</span></h2>
<p><em><strong><span lang="EN-US" xml:lang="EN-US">Potential Support</span></strong></em></p>
<ul>
<li><strong>14-day simple moving average (SMA)</strong></li>
<li><strong>1.08444:</strong> intraday low on June 23rd</li>
<li><strong>100-day SMA </strong>around<strong> 1.080 </strong>psychologically-important level</li>
</ul>
<p>&nbsp;</p>
<p><em><strong><span lang="EN-US" xml:lang="EN-US">Potential Resistance</span></strong></em></p>
<ul>
<li><strong>1.09426:</strong> 50% Fibonacci level from EURUSD&#8217;s Jan 2021 &#8211; Sept 2022 drop, peak-to-trough</li>
<li><strong>1.09708:</strong> intraday high on June 16th</li>
<li><strong>1.10123:</strong> recent cycle high</li>
</ul>
<p><img decoding="async" loading="lazy" class=" lazyloaded" src="https://www.forextime.com/s3-static/users/user16/EURUSDDaily_21.png" alt="" width="1024" height="768" data-entity-type="file" data-entity-uuid="6a38c1c1-2ba5-4dd5-a75e-c001ea684566" data-src="/s3-static/users/user16/EURUSDDaily_21.png" /></p>
<p>&nbsp;</p>
<blockquote>
<h3><em><span lang="EN-US" xml:lang="EN-US">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.</span></em></h3>
</blockquote>
<hr />
<p><img decoding="async" loading="lazy" class="size-full wp-image-54242 alignleft" src="https://www.investmacro.com/articles-analysis/wp-content/uploads/2014/07/Forex-Time-Logo.png" alt="Forex-Time-Logo" width="262" height="90" /><strong>Article by <span><a href="https://www.investmacro.com/contributors/contributor-profile-forextime/">ForexTime</a></span></strong></p>
<p><strong>ForexTime Ltd (FXTM)</strong> is an award winning international online forex broker regulated by CySEC 185/12 <a href="http://www.forextime.com" target="_blank" rel="noopener">www.forextime.com</a></p>

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