EUR USD Weak CPI increases pressure on ECB again

Market sentiment has stabilized after yesterday’s China-induced panic, but traders remain on edge ahead of the year’s second US trading session. As my colleague Fawad Razaqzada noted earlier today, safe havens like gold remain in demand, and that phenomenon has extended to the FX market, where both the US dollar and Japanese yen are catching a bid today.

On the other side of the coin, the European currencies are seeing the majority of the selling pressure, with the euro itself falling the most. From a fundamental perspective, the reason for euro bearishness is obvious: this morning’s December CPI report from the Eurozone showed a lackluster 0.2% year-over-year increase in prices, below the 0.3% gain expected. Meanwhile the core CPI reading, which filters out volatile food and energy prices, rose by just 0.9% y/y. After December’s half-hearted easing measures from the ECB, pressure is already growing for more aggressive action from the Draghi and company, putting the single currency on the back foot once again ahead of the ECB meeting in two weeks’ time.

Technical View: EUR/USD

Speaking frankly, the short-term technical outlook for EUR/USD is just as bleak as the fundamental picture. The pair has broken below key previous support at 1.0800 to a fresh 1-month low. Adding insult to injury, rates have carved out a short-term head-and-shoulders pattern over that period, signaling a shift from buying to selling pressure and marking a potential medium-term top near the 1.10 level.

The secondary indicators are showing what you’d expect: the 4hr MACD is trending lower below both its signal line and the “0” level, though the corresponding RSI indicator is peeking into oversold territory, raising the probability of a short-term bounce.

Nonetheless, the technical bias in EUR/USD will remain to the downside as long as rates hold below previous-support-turned-resistance at 1.0800. With the “divergent monetary policy” theme back in the market’s crosshairs, bears may push for a move down to the Fibonacci retracements of the post-ECB rally at 1.0730 (61.8%) and 1.0690 (78.6%) next, potentially followed by the measured move target of the head-and-shoulders pattern near previous support at 1.0540, depending on this week’s economic data.