EUR/USD: US Inflation Data And ECB In Focus As Oil And Yields Climb Further

Risk appetite remained low as stocks and bonds fell Wednesday morning, owing to continued oil-price gains amid the deteriorating situation in the Middle East. In the FX space, the dollar was catching a small bid after initially falling against most major currencies. The euro and other currencies where the economy is reliant on energy imports may come under further pressure if Brent oil breaks the $100 barrier and stay there for a while. Meanwhile, from a macro point of view, we have the ECB’s policy decision being sandwiched between two important US inflation data releases, as we transition into the second half of the week. 

Crude oil gains put EUR/USD in spotlight

In recent months, economic data has become increasingly more important for the FX volatility than energy prices. This is because unlike earlier in the year, the starting point for any renewed gains in oil prices has been much higher than the pre-conflict levels. At the start of the year, oil prices skyrocketed both in nominal terms and percentage terms as they climbed from a low base. Recent gains have been far less eye-catching in percentage terms and therefore marginally less inflationary (remember inflation describes the rate of change of prices).

Well, that is until now. If we see the crude oil price move further higher from here, then surely the euro will react negatively, and the focus will turn away from data once more. At the time of writing, oil prices were looking increasingly bullish as Brent closed in on that psychological level of $100.

ECB, PPI and CPI among key highlights this week

The economic calendar is getting busier as we head towards the second half of the week. The ECB’s rate decision is on Thursday, September 10, and the decision is likely to be a hike, as discussed above. The eurozone economy has shown surprising resilience to the Middle East war, while headline inflation has continued to climb with oil prices remaining elevated. What this means for the euro and what we think will happen is something I have discussed further below. 

Stateside, the first of the two US inflation reports, namely producer price index (PPI), will be sandwiched between the ECB’s interest rate decision and press conference, making the EUR/USD a key pair to watch around 13:00-14:00 BST. Inflation remains the only major US data release before the Fed’s next meeting. 

But the big one is saved to last: US consumer price index (CPI) on Friday, September 11. There’s a bit of a divergence within the Fed, with Chair Kevin Warsh adopting a hawkish stance at the Jackson Hole summit, while Governor Christopher Waller was less so last week, preferring to see the inflation data before deciding on a rate hike or maintaining the current rates. This makes the CPI release a crucial piece of economic data, being the last major update before the Fed’s next meeting.

Stronger Eurozone economy has kept euro’s downside limited 

For now, keeping the EUR/USD mildly supported has been the relative monetary policy outlooks in the Eurozone and US. With both central banks turning hawkish, the pair has remained in consolidation, rather than drop given what the oil market is doing right now. That’s thanks largely to surprisingly strong Eurozone data, whereas in the US, economic growth has been faltering. Eurozone GDP was revised to +0.6% in Q1 from +0.4% initially estimated, while Sentix Investor Confidence improved to +5.1, as we saw earlier this week. However, industrial production in Germany (-1.1%) and France (-0.4%) both showed unexpected falls, which bodes ill for the single currency. 

Still, the overall relatively stronger Eurozone data we have seen in recent months, combined with elevated energy prices, has seen traders price in a rate hike from the ECB and a couple more hikes are also expected during this cycle. The key question therefore is whether the ECB will validate the hawkish repricing of eurozone rates, or whether Christine Lagarde and co will turn out to be a little less dovish. 

Validating the hawkish pricing of Eurozone rates will likely provide a bit more support for the euro, while if Lagarde suggests the central bank is happy to see through the latest spike in oil prices and imply that rates will not be tightened further, then that could hit the euro. There is also the risk of stagflation which is another negative for the EUR/USD.

EUR/USD technical analysis and key levels to watch

Continued consolidation is the name of the game for the EUR/USD, although a drop from current levels should not come as surprise with oil surging higher and the pair testing key resistance around 1.1635/50 at the time of writing. This area was the last support pre breakdown on Friday August 28. Here, we also have the 200-day average converging.

A potential move lower from here would make technical sense, with the next support seen around 1.1565-75 area. Break that and 1.1500 could become in focus ahead of the 1.1405 level next. 

Meanwhile, if the above-mentioned resistance of 1.1635/50 area breaks instead, then 1.1700 could be re-tested fairly quickly. Above that 1.1800 is the next upside objective if the potential rally continues. But for that to happen, you’d feel a drop in oil is warranted.