EUR/USD: Sell The Rumor, Buy The Fact? Why US CPI May Trigger A Euro Rally

When everybody is expecting an upside surprise, there is only one likely reaction – disappointment, and that may trigger price action. Investors are hyped up ahead of the release of US Consumer Price Index figures for March due out on Tuesday, awaiting inflation to lift its ugly head.

Year-on-year forecasts for CPI were already elevated as prices sharply dropped in March 2020 due to the pandemic’s outbreak, causing a “base-effect.” However, projections were further bumped up after producer prices showed a monthly leap of 1% last month. That implies that prices are already bubbling higher due to supply issues.

The US dollar is already on the rise ahead of the release, rising alongside bond yields. However, this sell-off of bonds comes despite a successful ten-year Treasury bond auction on Monday. Federal Reserve officials have been maintaining their calm tone – waiting to acknowledge price rises only if they are sustained.

With healthy demand for US debt and calming messages from the Fed, it seems that the upside driver for the greenback is only expectations for the upcoming CPI release. On this background, a “buy the rumor, sell the fact” response in the dollar is a plausible outcome. For EUR/USD, it means further upside potential.

An increase in the euro’s value would come despite ongoing issues in Europe. German Chancellor Angela Merkel’s CDU/CSU political bloc is split on who would lead the party in September’s general elections as the “locomotive” of the old continent continues grappling with COVID-19.

On the other hand, hopes for an accelerated vaccination campaign and potentially robust estimates from the German ZEW Economic Sentiment statistics for April may keep the common currency bid.

All in all, there is room for EUR/USD to rise, driven mostly by a turn-down in the dollar.

EUR/USD Technical Analysis

(Click on image to enlarge)

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