Key Talking Points:
- EUR/USD hangs on to bullish support ahead of ECB and US CPI data
- EUR/GBP struggles to consolidate momentum to break its current range
EUR/USD is holding in a tight range ahead of the US CPI data and ECB meeting tomorrow. The pair hasn’t been able to attract much momentum over the last few sessions and is still trying to recover some lost ground after Thursday’s pullback. The RSI is flat in the center of the range and the MACD is becoming less negative so EUR/USD has a chance to attempt a new push above 1.22, although the 20-day SMA at 1.2195 might offer some resistance.
EUR/USD Daily chart
For now, the sluggish momentum in the US Dollar keeps the pair supported, but that may change when the US CPI data comes out tomorrow. The May reading is expected to be a little softer than the previous month although the headline CPI is expected to creep up to 4.7%. If the Chinese data is anything to go by, inflationary pressures could be picking up pretty quickly, especially in production inputs as shown by the PPI data, which shot up to 9% in China in May.
If tomorrow’s data shows a bigger rise in inflation than expected, I would expect the US Dollar to pick up bullish momentum on the back of rising bond yields. Despite the Fed reassuring that inflation is likely to be transitory and that monetary policy will remain unchanged throughout the summer, a stronger reading for inflation will cause investors to anticipate a rate hike sooner than later, that is until the Fed speaks up again or another round of jobs data proceeds to calm their nerves. Regardless, I would expect USD crosses to be highly sensitive to tomorrow’s data so there is likely to be a slight increase in EUR/USD volatility. On the upside, I would expect bulls to target a break above 1.22, with an attempt to climb back above the ascending trendline, which now sits at 1.2245. To the downside, look for a break below 1.2145 as a sign of further weakness to come.
For EUR/GBP the main focus is on the ongoing Brexit battle surrounding Northern Ireland. The UK and EU are set to meet today with focus on the provisions of the Brexit deal that effectively created a customs border between Northern Ireland and the rest of the U.K., which has not boded well for many pro-British residents of the island. The EU defends the need for a border to protect the bloc’s single market, but the rise in tensions could lead to further violence in Northern Ireland.
The pair is trading in a tight range ahead of the meeting but I would expect GBP to have limited upside in the short term as the country is facing a few headwinds with regards to the easing of lockdown measures given the spread of the Indian Covid-19 variant. There is also some optimism surrounding the EU’s outlook in the coming months so I would expect EUR/GBP to have a slight bullish bias going forward, although there does seem to be a lack of clear momentum at the momentum, so sideways consolidation may continue for the time being.
EUR/GBP Daily chart
— Written by Daniela Sabin Hathorn, Market Analyst
Follow Daniela on Twitter @HathornSabin
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.