US CPI Drop Boots EUR

EURUSD remains firm at the start of the week following a breakout move higher last week. The catalyst behind the move was a deeper drop in US inflation than had been expected. With US CPI falling to 3% from 4.1% prior, the market has undergone a significant repricing of US rates. With no further hikes now expected after the July meeting, USD has been under heavy selling pressure in recent days. Expectations of a lengthy pause from the Fed, ahead of projected rate cuts into Q1 next year are likely to keep USD weighted to the downside going forward. Incoming data will play a key part in this story with any signs that the US economy is cooling likely to drive periods of accelerated USD depreciation.

Hawkish ECB Expectations

At the same time, hawkish ECB expectations remain alive and well. With ECB chief Lagarde reaffirming the bank’s message last week that it stands willing to act as necessary, traders are looking for at least two further hikes this year. Messaging around inflation has generally been that while a decline in inflation is starting to show, the bank still has a way to go in order to bring inflation down to target. Consequently, EURUSD looks likely to remain well-bid near-term while the current narrative remains.

Technical Views

EURUSD

The rally in EURUSD has seen the pair breaking out above the 1.1126 level last week. Now moving back inside the bull channel, the focus remains on further upside, in line with bullish momentum studies readings. 1.1503 is the key resistance level to note while, to the downside, 1.0785 is the key support.