The EUR/USD pair is pushing relentlessly lower with a fresh boost to the Dollar being provided by inflation data released on Wednesday, February 15.
The exchange rate has broken lower to 1.0534 after inflation in the world's largest economy hit a multi-year high in January with a reading of 0.6% being announced by the Bureau of Labor Statistics.
The January increase in US inflation was the largest seasonally adjusted all items increase since February 2013 and puts pressure on the US Federal Reserve to follow a more aggressive and pro-USD round of interest rate rises.
A sharp rise in the gasoline index accounted for nearly half the increase, and advances in the indexes for shelter, apparel, and new vehicles also were major contributors.
The energy index increased 4.0% in January as the gasoline index advanced 7.8% and the index for natural gas also increased. The food index, which had been unchanged for 6 consecutive months, increased 0.1%. The food at home index was unchanged, while the index for food away from home rose 0.4%.
"Inflation sailed past the Fed’s two per cent target and with economic growth expected to tighten, Yellen may well intervene on multiple occasions in the coming months," says Dennis de Jong at UFX.com.
The EUR/USD has now breached below the key 50-day moving average and the 50% retracement of the previous rally – both very bearish signs.
Richard Perry, market analysts at internet broker’s Hantec Markets, sees no let up in the decline:
“The strength of the dollar continues to pull the pair lower. The key support at $1.0577 was breached on an intraday basis but the sellers could not drive for a close below, however, it seems as though it is only a matter of time. The downtrend continues and the negative candles continue to rack up.”
Commerzbank’s technician Karen Jones, meanwhile sees temporary support kicking in from the lower border of the Ichimoku cloud, a Japanese charting technique used by many analysts in the east, however, despite she too is overall bearish.
“Negative bias: EUR/USD continues lower, has eroded the 55-day ma and sits on the base of the cloud at 1.0563. We suspect will need to go below here in order to re-target recent lows at 1.0352/40. The market will remain directly offered below its 20-day ma at 1.0699,” commented Jones.
We too see an extension lower, albeit with the possibility of a small pull-back on the way down.
However, a break below the current 1.0543 mark for us a continuation down to the 1.0490 level, just above the S1 monthly pivot.
The MACD is corroborating the bearish forecast by breaking below its zero-line and moving lower.
News and Data for the Euro in the Second Half of the Week
The Euro has been temporarily thrown a lifeline on Wednesday by data showing a higher-than-expected Trade Surplus, which rose to 28bn in January when it had been forecast to fall to 23bn.
However, this comes after some weakness due to the brewing Greek debt crisis.
On Thursday, the minutes from the European Central Bank (ECB) Monetary Policy Meeting in February are published and analysts will be scouring documents for signs the ECB is ready to reduce its accommodative stimulus.
This is probably unlikely given the problems in Greece as well as the potential for a political upset in the Eurozone, with all the elections in 2017 and the rise of support for nationalism.
The overall outlook for the Euro remains biased to the downside therefore.
“EUR lost ground against several other currencies overnight. The immediate concern is worries about Greek debt restructuring. The medium-term concern is the European elections. Against this background, the ECB won’t be thinking about ending its QE program anytime soon. I think EUR can weaken further,” said FXprimus’s market strategist, Marshall Gittler in a note on Wednesday morning.
Upcoming Data for the Dollar
On Thursday, there is yet more significant data, with Building Permits, Housing Starts and the Philadelphia Fed Manufacturing Index.
Fed’s Yellen was quite upbeat about the outlook for the economy urging a speedier adjustment higher for interest rates to avoid inflation running away, rather than the previous caution, and so the data needs to be viewed within that context.
Obviously, Inflation will be the focus given its direct influence on the Federal reserve and so a markedly lower result would produce the most volatility – although that seems unlikely.
A substantially higher result, however, would probably boost the Dollar even more as it would solidify March meeting rate hike expectations.