EUR/USD – Euro Slips Under 1.13 as Eurozone CPI Falters

EUR/USD has posted slight losses on Wednesday, as the euro trades at 1.1270 in the European session. On the release front, Eurozone CPI posted a decline of 0.2%, matching the forecast. Eurozone Core CPI gained 0.7%, also matching the estimate. In the US, the Federal Reserve will release the minutes of its April policy meeting. As well, the US will release Crude Oil Inventories, with the markets expecting a sharp decline of 3.4 million barrels. On Thursday, it’s the ECB’s turn to release its minutes, and the US will publish Unemployment Claims and the Philly Fed Manufacturing Index.

Inflation levels remain at very low levels in the Eurozone, as underscored by Eurozone Final CPI. The April report dipped to -0.2%, marking its second decline in three months. Core CPI was stronger at 0.7%, but this was lower than the previous reading of 1.0%. With the threat of deflation posing a major headache for the ECB, Mario Draghi and Co. are under strong pressure to take action and bolster inflation. However, it’s questionable if the ECB has any monetary ammunition left – interest rates are at zero and the QE program was expanded earlier this year. Further easing would weaken the euro, so the fact that the ECB has remained on the sidelines has helped the euro trade at high levels.

Last week, Eurozone and Germany GDP reports were released for the first quarter, and both indicators posted respectable gains. Germany’s economy expanded 0.7%, above the forecast of 0.6%. Eurozone Flash GDP gained 0.5%, shy of the estimate of 0.6%. Despite growth in the first quarter, the Eurozone remains stuck with very low inflation levels. German Final CPI declined 0.4% in April, compared to a gain of 0.8% a month earlier.

All eyes are on the Federal Reserve, which will release the April minutes later on Wednesday. The Fed has sent out the message that a June hike is on the table, but the markets remain skeptical, especially after the weak Nonfarm Payrolls report earlier this month. With the economy showing mixed employment numbers and inflation stuck at low levels, a June hike would be nothing less than a shock, a reason in itself for the Fed to remain on the sidelines. The markets are clearly expecting rates to remain at the current level of 0.25%, with the implied probability of a hike down to just 4%. Soft CPI numbers on Tuesday will only reinforce market sentiment that the Fed is unlikely to make a move prior to September.

EUR/USD Fundamentals

Wednesday (May 18)

• 9:00 Eurozone Final CPI. Estimate -0.2%. Actual -0.2%
• 9:00 Eurozone Core CPI. Estimate 0.7%. Actual 0.7%
• Tentative – German 10-year Bond Auction
• 14:30 US Crude Oil Inventories. Estimate -3.1M
• 18:00 US FOMC Meeting Minutes

Upcoming Key Events

Thursday (May 19)

• 11:30 ECB Monetary Policy Meeting Accounts
• 12:30 US Philly Fed Manufacturing Index. Estimate 3.2
• 12:30 US Unemployment Claims. Estimate 276K

*Key events are in bold

*All release times are GMT

EUR/USD for Wednesday, May 18, 2016

EUR/USD May 18 at 10:00 GMT

Open: 1.1314 Low: 1.1256 High: 1.1316 Close: 1.1269

EUR/USD Technical

• EUR/USD was flat in the Asian session. The pair posted slight gains in the European session but then retracted.
• There is resistance at 1.1378
• 1.1278 continues to provide weak support

Further levels in both directions:

• Below: 1.1278, 1.1172 and 11054
• Above: 1.1378, 1.1495, 1.1609 and 1.1711
• Current range: 1.1278 to 1.1378

OANDA’s Open Positions Ratio

EUR/USD ratio is unchanged on Wednesday, consistent with the lack of movement from EUR/USD. Short positions command a strong majority (56%). This is indicative of strong trader bias towards EUR/USD breaking out and dropping to lower levels.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.