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The Euro's breakout above its six-month downtrend is losing conviction ahead of today's U.S. inflation release.
The Euro-to-Dollar exchange rate is trading at 1.1536 at the time of writing, down 0.06% on the day, having opened at 1.1541 and failed to hold an intraday high of 1.1550.
That leaves the pair sitting directly on the descending trendline it cleared little more than a week ago.
Price pushed through the trendline, ran to 1.1580, then stalled beneath the 100-day moving average and has spent the sessions since drifting back towards the line it broke.
Had we drawn the line a little higher, we might argue there was never a breakout, confirming the oftentimes random nature of technical analysis.
Nevertheless, the chart is still communicating the same message, namely that the euro really needs an injection of impetus or it will pull back.
Of course, this really isn't a euro story, but a dollar one and the nature of the looming CPI inflation release could be instrumental in determining how a clear technical junction in navigated.
"Dollar bears will be hoping that today's US July CPI release" delivers, says a daily note from ING, and the technical picture explains why they need it to: the breakout has not been confirmed.
Pound Sterling Live flagged on Monday that the trendline break faced its first test, with the 100-day moving average the obstacle overhead and a close above it required to turn a rally into a reversal.
Three sessions on, that close has arrived, but it couldn't have done so in a more insipid fashion.
The pair traded as high as 1.15808 on Friday before closing back below the average, tested it again this week, and has now rolled over into the trendline from above.
A break that cannot extend is a break that invites a retest, and a retest that fails turns the old resistance back into resistance; the distinction matters because the two readings point in opposite directions.
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If the move above the trendline holds, the six-month downtrend is over and the July low becomes a base.
If it does not, the pair has simply made a lower high beneath a falling ceiling, and the path of least resistance points back down towards the levels that contained this market through June and July.
Rania Gule, senior market analyst at XS.com explains the pair is caught between a Dollar still supported by inflation risk and a Dollar losing its rate advantage as hike expectations fade, and in her framing the 100-day average is the gateway that decides which force wins.
"What we are seeing may simply be the calm before a much larger move," she says.
That would concur with the observation that the pair is hunkered down on the trendline waiting for confirmation in either direction.
Direction to be Determined by CPI Print
The CPI inflation release is arguably the most important calendar event of the month, with an undershoot likely to weigh on the dollar. However, we suspect that an upside surprise will hit relatively harder (stronger dollar) as expectations in the market are already leaning relatively dovish.
Headline consumer price inflation is expected to rise 0.1% on the month, easing the annual rate to 3.4% from 3.5%, with core rising 0.2% for an annual rate of 2.5%.
Fed funds futures price roughly even odds of a 25 basis point hike in September, down from 75% at the end of July, with just over 40 basis points of cumulative tightening priced across the next twelve months.
Above: EUR/USD price action over one week.
A hot print pushes back against the recent pullback in Fed hike expectations and delivers a knee-jerk Dollar bounce via higher front-end yields.
However, such a reaction would be a fade, says one institutional analyst we follow.
"The scope for a material hawkish repricing looks limited which is a USD headwind," says Elias Haddad, Global Head of Markets Strategy at Brown Brothers Harriman, on the basis that policy is already restrictive against a neutral rate near 3.00%.
TD Securities looks for headline inflation at 0.15% on the month against a market consensus of 0.10%, which would be the kind of upside surprise that confirms the false break in EUR/USD.
Euro Lacks the Energy
Turning to the EUR side of the equation, ING says that unresolved Gulf tension is holding European natural gas above EUR 60 per megawatt hour, and that this is why better eurozone activity data has not translated into a stronger Euro.
That is a structural drag on the single currency that no single inflation print removes, and it is a reason to treat Euro strength this month as borrowed rather than earned.
Above: Oil prices are rising again. That's typically unfriendly for euro bulls.
The trendline drawn from May's high now runs through the 1.1447 region, which is also the horizontal level that capped this market through June and July.
That gives the area two separate reasons to matter, and it is the first destination if the false break confirms.
Beneath it sits 1.1325, the July low.
Gule puts the immediate support zone at 1.1513 to 1.1517, with a hot inflation print opening 1.1510 and then 1.1460.
On the upside, the requirement has not changed since Monday: a daily close above 1.1569 is what separates a rally from a reversal, and above that the pair opens the way towards 1.1650.
The medium-term case for the Euro has not been abandoned, and Gule notes that recent bank forecasts point towards 1.18 over a longer horizon, though she does not expect the path there to be direct.
Confirmation requires a daily close back beneath the trendline followed by a loss of 1.1447, and neither has happened.
