Euro’s Fate Hinges On US Inflation Data, Major Tech Levels To Watch On EUR/USD

By Diego Colman of DailyFX.com

Wednesday, November 9, 2022 1:05 PM EDT

EUR/USD posted moderate losses on Wednesday, down 0.4% to 1.0025, on account of fragile sentiment amid weakness in equity markets and a sharp sell-off in the cryptocurrency space following news that FTX is going through a liquidity crisis and that its bailout deal announced yesterday could fall apart at the eleventh hour.

Traders were also cautious due to the lack of clarity on the results of the U.S. midterm elections. Republicans were expected to sweep many of the close congressional races, but the red wave failed to materialize. However, they remain favored to win a majority in the House of Representatives, paving the way for a divided government, which could be slightly negative for the U.S. dollar on a medium-term horizon.

Looking politics, the October U.S. consumer price index report is likely to grab all the attention on Thursday, as the results will help guide expectations for the Fed's interest rate outlook. That said, annual headline CPI is expected to clock in at 8.0% from 8.2% in September. Meanwhile, the core indicator is seen easing modestly to 6.5% from 6.6% previously, a very slow directional improvement.

U.S. inflation has been sticky and topped estimates in recent months, suggesting that another upside surprise is not out of the question, particularly with rent costs still biased upward. Should this thesis play out, the FOMC terminal rate could drift higher, with traders pricing in another 75 bp hike at the December meeting. This could bolster Treasury yields, boosting the U.S. dollar across the board and setting the stage for a sharp drop in EUR/USD.

On the flip side, if inflation numbers come below forecasts and point to a meaningful deceleration in price pressures, the market may tone down its hawkish bets for the terminal rate that have built up since the last Fed gathering. In this scenario, the euro may be well positioned to resume its recovery, but any rise will be limited by the dire economic conditions facing the European Union.

EUR/USD TECHNICAL ANALYSIS

The EUR/USD stalled and pivoted to the downside after failing to clear resistance near the 1.0100 area. If sellers retake decisive control of the market and push the exchange rate lower in the coming sessions, initial support appears around the parity level. On further weakness, the focus shifts to 0.9870, followed by 0.9760, the lower limit of a short-term rising channel. On the flip side, if bulls manage to get the upper hand again, the first hurdle lies at 1.0100, followed by 1.0180.