EURUSD Under Pressure Ahead of US CPI, ECB Rate Decision

Markets are bracing for two major risk events this week: US consumer prices are expected to accelerate, while the ECB raises rates to address inflation, both of which may pressure EURUSD.

The Factors Moving the Market

• EURUSD has come under pressure as the US economy remains resilient while the Eurozone turns negative ahead of key rate decisions.
• US inflation is expected to continue accelerating due to the geopolitical situation, but the market is anticipating that the new Fed Chair will push for alternative measures.
• ECB expected to hike despite poor GDP data in an effort to get ahead of inflationary pressures, but the euro could fade gains as traders worry about the outlook.

US Inflation Rising, But Fed Holding

The EURUSD trended lower over the last month as the dollar reached two-month highs, with the market pricing in a higher chance that the Fed will hike by the end of the year. With price pressures from energy costs pushing both the world's largest central banks towards rate hikes, currencies are reacting differently. The Fed is seen as much slower to raise rates, with 70% odds of just one hike, while the ECB is projected to raise at least twice in the same period. Part of this stems from the perception that the new Fed Chair will seek alternative ways to control inflation amid a shift in direction at the central bank.

US President Donald Trump reiterated his calls to lower rates after strong jobs numbers over the weekend. Markets are closely watching how Trump-appointed Kevin Warsh will respond to White House pressure amid rising inflation readings. The latest consumer price data will be published on Wednesday, with the consensus for headline CPI accelerating to 4.0% from 3.8% previously. The core rate, which the Fed has so far been tracking more closely, is expected to tick up to 2.9% from 2.8%. A beat in this reading could raise the odds for a Fed rate hike by the end of the year and strengthen the dollar.

ECB Hiking Despite Negative Growth

The ECB is widely expected to hike rates by 25bps at Thursday's policy meeting, with the market pricing in a 99% chance. The focus will be on what the bank signals at the July meeting, with President Christine Lagarde's post-rate-decision press conference likely to get the lion's share of attention. Markets are pricing in a 60-40 chance of a pause before the next hike, and Lagarde's tone could shift those odds. Europe's central bank is motivated to "get ahead" of energy prices spilling into the rest of the economy, starting a tightening cycle after Q1 GDP growth turned negative for the first time in five years.

A more hawkish ECB would normally support the currency, but the euro has come under pressure recently due to growth concerns. The shared currency might react negatively if the ECB projects hikes happening at a faster pace than the market has already priced in. On the other hand, if Lagarde acknowledges economic weakness, the prospect of a more conservative tightening regime might support the euro.

EURUSD Bounces Off at 1.1500, But Can it Hold the Line?

Following last week’s breakdown, EURUSD appears to be bouncing off the 1.1500 handle for now. However, it remains close to a recently expanded lower VWAP while trading below the 1.1576 swing and the middle VWAP at 1.1612. Losing the round support could open the door to the 1.1420 and 1.1410 swings, whereas a move to the upside could eventually flatten out the VWAP and extend as high as 1.1700 over the short-to-medium term.

Source: SpreadEx | EURUSD, Daily Chart