The Euro is consolidating around the 1.38 level against the US Dollar after it gapped higher on the release of Eurozone inflation figures earlier. The single currency has been struggling for upward momentum since the beginning of this year but is now set to challenge the $1.3815 resistance point dating back to last October.
Traders have obviously interpreted this mornings Eurozone Consumer Price Index (CPI) figure as confirmation that deflationary pressures have eased within the single currency bloc. Prior to the publication of this morning’s data there was considerable concern within the markets that the Euro area was set to enter a deflationary period.
The headline CPI number remained consistent with the previous month’s 0.8% year-on-year reading. The figure that actually moved the FX market was the CPI ‘core’ number. This core number is calculated when volatile influencers such as food, energy, alcohol and tobacco are stripped out of the representative retail basket. This morning’s core reading of 1.0% was significantly ahead of expectations and well on the way towards the European Central Bank’s (ECB) inflation target of 2%.
This buy’s the ECB some time. Market’s had with near certainty until this morning priced in an interest rate cut at next weeks Governing Council meeting. This prospect of further monetary loosening has been weighing on the Euro since the beginning of this year. What we witnessed in the FX market this morning was a sudden lifting of this pressure. The Euro’s gap higher not only suggests that the ECB will forego a rate cut next week but that there is now a reduced prospect that we will face any rate cut in the near future.
The Euro posted gains across the board, creating a small gap higher in EUR/GBP to .8269 and a more significant gap against the Yen to 140.70. EUR/CHF likewise gained sharply but rapidly gave up these gains, suggesting that the Swiss National Bank took the opportunity to rebalance some currency stocks.
Remember that chart gaps have a tendency to fill themselves in, the gap higher on the 5 minute EUR/USD chart set at 10am GMT this morning is still open. The implication being that we are likely to see a short term pull back in this currency pair before experiencing any sustained move higher.
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