Euro Area’s Deflationary Pressure Holding the EUR/USD Below 1.34

Euro Area's Deflationary Pressure Holding the EUR/USD Below 1.34

We have seen the EUR/USD fall sharply in July from 1.37 to about 1.3365 yesterday. The non-hawkish FOMC stalled the USD’s advance somewhat, but the reaction is so far very brief. USD-strength could be returning today. On top of USD-strength, the Euro has been pressured, making EUR/USD a very bearish pair right now.

inflation July EA

(source: click to enlarge)

During the 7/31 European session, traders saw a slew of Eurozone data. Some of them relating to spending, retail sales, and unemployment, were positive. But the most important of the data set was July’s inflation in the Euro Area. According to Eurostat’s Flash Estimate, CPI inflation cool to an annual rate of 0.4% in July, down from 0.5%, and lowest since 2009. The increasing deflationary risk can pressure the ECB into employing further monetary stimulus, a prospect that has been weighing on the Euro.

Today, as EUR/USD consolidated, the soft inflation data helped it stay below 1.34. Above 1.34, the next support/resistance pivot is around 1.3440.

EUR/USD 1H Chart 7/31
eurusd 7/31 1h chart

(click to enlarge)

When you look at the daily chart, you can see that the market has been bearish since May, when price made a 2014-high at 1.3993. Now the downtrend looks a little overextended based on the RSI reading, but the momentum is strong. It would be like trying to catch a falling knife for those trying to buy here around 1.3380.

EUR/USD Daily Chart 7/31
eurusd 7/31 daily chart

(click to enlarge)

In a consolidation scenario, there is upside risk to the 1.3475-1.35 area. This area should also be reinforced as resistance by a falling trendline.
There is an equal downside side risk toward the 1.3295-1.33 lows from Nov. 2013.

US Jobs Report
The Non-Farm Payroll (NFP) report on Friday might help traders decide whether to consolidate, or extend the current decline. In June we had 288K jobs added to the economy. In July, economists forecast around 230K, which is still pretty decent. If the reading is in-line with expectations or lower, we can see USD finally consolidate, and the EUR/USD rally in the short-term. A reading above 250K should be USD-positive, and send EUR/USD toward the 1.3295-1.33 area without much of a correction.

To contact the reporter of this story, email Fan Yang at
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Fan Yang has been a professional forex trader and analyst since 2007. He specializes in technical analysis and has a Chartered Market Technician designation since 2011. He was the chief technical strategist at CMSFX He was also the founder and chief currency strategist at FXTimes Over the years, Fan has not only been a trader and analyst but also an educator. As a proponent of both technical and fundamental analysis in trading, Fan advocates simplicity and discipline as key factors in making trading decisions when faced with so many "clues" and "signals". Currently Fan Yang is the chief currency analyst and webinar instructor at