On Monday, the EURUSD started a second week in the red, dropping to a lowest level in two weeks. The weakness in the pair could be attributed to the strengthening US dollar amid the release of upbeat inflation data. Speaking technical analysis, a bearish signal is identified on the weekly chart that could weigh on the pair.
Strong PPI Reinforces Tapering Expectations
US Producer Price Index (PPI) released by the US Bureau of Labor Statistics printed 0.7% for the month of August. The data that measures the average changes in prices in primary markets of the US by producers of commodities in all states of processing, did not fail to beat the market consensus in seven out of eight releases in 2021. Looking at annual PPI excluding Food & Energy, the figure had also surpassed market forecast marginally at 6.7%. Upbeat PPI data is generally bullish for a country’s currency. As the market is anticipating for a Fed tapering this year, the bullish inflation data further reinforces the consensus, boosting the greenback against Euro.
The greenback also enjoyed a boost last week when President and CEO of the Federal Reserve Bank of Philadelphia said that he was in favour of a tapering process sooner rather than later. In his interview with Nikkei, he mentioned that Fed’s large-scale purchases has achieved its objective to get the (treasury and mortgage-backed securities) markets functioning again, and that the reason to have the asset purchases is no longer relevant.
ECB to Trim off PEPP
With the high vaccination rates across Europe, the EU economy is recovering. On Thursday, the European Central Bank (ECB) announced that they will trim their Pandemic Emergency Purchase Programme (PEPP) over the coming quarter. ECB President Christine Lagarde conveyed that the ECB will maintain favourable financing conditions with a ‘moderately lower pace’ of asset purchases as a strategy to reach its inflation target of 2%.
Zooming out on the weekly chart, the EURUSD had been rejected off a support-turned-resistance neckline of a completed head and shoulders pattern. The reversal pattern that stretched back to July 2020 bounced off the neckline on several occasions before finally breaking down from the level in July this year. Head and shoulders pattern is a bearish reversal pattern that signals downside upon completion. However, after the completion, EUR displayed strength and retested the neckline resistance but was unsuccessful in its attempt. Looking ahead, we hold a bearish bias view on EURUSD as validated by a bearish divergence on the RSI.
Coming up next, we forecast that the EURUSD will be headed to set its March-April support at 1.175. If the price drops below this target, August low at 1.166 would serve as the next support level.
Key events to watch in the coming week:
Tuesday, Sept 14
USD – Consumer Price Index (MoM)(Aug), Consumer Price Index ex Food & Energy (MoM)(YoY)(Aug)
Wednesday, Sept 15
EUR – Labor Cost (Q2), Industrial Production s.a. (MoM)(Jul)
Thursday, Sept 16
USD – Retail Sales Control Group (Aug), Initial Jobless Claims (Sep 10), Initial Jobless Claims (Sep 10), Retail Sales (MoM)(Aug)
Friday, Sept 17
EUR – Consumer Price Index (MoM)(Aug), Consumer Price Index – Core (YoY)(MoM)(Aug), Michigan Consumer Sentiment Index (Sep)
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