Eurozone climbing into the higher inflation boat: EUR/USD
Joe Perry June 2, 2021 10:50 PM
Will the ECB reduce bond purchases, do nothing, or even increase them due to higher inflation?
Earlier, the Eurozone released its Producer Price Index (PPI) data for APRIL, which was 1%, vs an expectation of 0.5% and 1.1% in March. No big deal, right? Old data. But theoretically, PPI feeds in the Consumer Price Index (CPI) in subsequent months. On Tuesday, the Eurozone released its CPI data for MAY. (Why they release April PPI after May CPI, I have no idea!). May’s CPI reading was 2%. This is the highest reading since October 2018. The ECB has a target inflation of just below 2%. However, as with the US Fed, the ECB assumes the inflation is due to base effects (which is probably true, given where the economy was last year) and temporary factors (aka transitory).
Looking further into inflation, the IHS Markit Eurozone Manufacturing PMI was also released earlier this week. The reading for May was 63.1, the highest ever. Similar to the US, which we discussed in the Currency Pair of the Week, the EU is having a big supply chain issue. As a result of increased demand and lower supply, prices are rising. The output inflation was the highest in 18 years! The ECB meets next week. Recall that at the March meeting, the ECB increased the pace of their bond buying. The question that traders will be looking for an answer to is “Will the ECB cut back on the pace of bond buying to pre-March levels, increase it to try and lower inflation, or keep it unchanged?”
EUR/USD formed a shooting star candlestick on a daily timeframe. We discussed shooting stars in our most recent webinar on candlestick patterns and how they tend to be 1-day reversal patterns. Today, price broke lower below the bottom trendline of an ascending wedge, which was discussed in our webinar last week on Chart Patterns. Last Friday, price had a false breakout below the wedge. Can it happen twice within 4 days?
Source: Tradingview, City Index
On a 240-minute timeframe, after breaking the trendline, EUR/USD held the 38.2% Fibonacci retracement from the May 5th lows to the May 28th highs near 1.2159. The pair also formed a bullish candlestick formation. Typically, the longer-term daily shooting star would trump a short-term hammer. Thus far, EUR/USD is holding the upward sloping trendline. The next resistance above the near-term trendline is between 1.2245 (early Jan highs) and 1.2267 (May 25th highs). Above there, resistance is at 1.2419, the highs from April 2018! Support below the 38.2% Fibonacci retracement is at the May 28th lows of 1.2133 and the 50% retracement level from the same timeframe near 1.2161. Below there is the 61.8% Fibonacci retracement at 1.2093.
Source: Tradingview, City Index
With the higher inflation data from the EU, the ECB is going to have a tough decision on its hands when they meet next week. Will they reduce bond purchases, do nothing, or even increase them due to higher inflation?
This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.
StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.
In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.
StoneX Financial Pte. Ltd. is not under any obligation to update this report.
Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit cityindex.com.sg for the complete Risk Disclosure Statement.