Analysis of Eurozone CPI and its Impact on EUR/USD

Analysis of Eurozone CPI and its Impact on EUR/USD

The Eurozone preliminary core CPI rate for April continued to inch lower at 2.7% y/y, marking its slowest pace of inflationary pressure since February 2022. This downward trend is significant as it reflects a weakening economic situation within the Eurozone. Additionally, the widening spread between 2-year and 10-year Eurozone sovereign bonds and US Treasuries suggests a potential medium to long-term bearish trend on the EUR/USD.

In comparing inflationary trends between the Eurozone and the US, it is crucial to note that the pace of change is more important than the absolute change levels. While the Eurozone’s core CPI rate stood at 2.7% y/y in April, higher than the US core CPI rate of 2.6% y/y in March, the trend in the Eurozone has been on a steady decline. On the other hand, the US core CPI rate has been on a slight upward trajectory. This disparity in inflationary trends indicates a potential shift in the monetary policies of the European Central Bank and the US Federal Reserve.

The EUR/USD has been on a downward trend since December 2023, with an accumulated decline of -4.8%. The key fundamental factor that is likely to dictate the directional bias of the EUR/USD in the medium to long-term is the path of inflation in both regions. With the Eurozone experiencing a slowdown in inflationary pressures and the US exhibiting a more elevated trend, the case for a weaker EUR/USD pair is strengthened.

In the short-term, the EUR/USD has been trading sideways near its 20-day moving average. Market participants are eagerly awaiting the upcoming US Fed’s monetary policy decision on 1 May, with a focus on Fed Chair Powell’s press conference. A key resistance level to watch is at 1.0740, which could potentially trigger a corrective countertrend rebound. However, a clearance above this level could lead to further intermediate resistances at 1.0800 and 1.0850.

The widening spread between Eurozone sovereign bond/US Treasury yields indicates a more cautious sentiment towards the Eurozone economy compared to the US. A less dovish Fed stance, coupled with the ECB potentially raising interest rates in the coming months, could further weigh on the EUR/USD pair. Investors are likely to monitor the central banks’ policy decisions and inflationary trends closely to gauge the future direction of the currency pair.

The Eurozone’s declining inflationary pressures, coupled with a more upbeat inflation outlook in the US, are likely to impact the EUR/USD exchange rate in the medium to long-term. Market participants should remain vigilant of key resistance levels and central bank announcements to navigate the evolving market dynamics effectively.

Technical Analysis

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