EUR/USD Continues to Squeeze After Positive CPI Data

EUR/USD Continues to Squeeze After Positive CPI Data

The EUR/USD started the week with a bearish breakdown of a flag pattern formed last week. During the June 1st session, price action looked poised to fall towards 1.0818. However, price failed to clear the 1.09 area. The 1H RSI failed to tag 30, which reflects lack of bearish momentum.

EUR/USD 1H Chart 6/2
eurusd 1h chart 6/2
(click to enlarge)

After consolidating around 1.0925 for the early part of the 6/2 session, the EUR/USD found some fuel to rally during the European session heading into the US session. Price is now back above last week’s high around 1.10, reflecting another leg of bullish correction.

The current bullish correction, or squeeze, can be attributed to better-than-expected CPI data out of the Eurozone.

CPI Flash Estimate y/y (May): 0.3%
Forecast: 0.2%
Previous: 0.0%
eu cpi may 2015
(click to enlarge; source:
Core CPI Flash Estimate y/y (May): 0.9%
Forecast: 0.7%
Previous: 0.6%

Although the annual CPI inflation rate is still very low at 0.3% in May, the print was better than expected and suggests that inflation has bottomed at the beginning of the year, in January, when the inflation rate was -0.6%.

The market believes that as inflation turns, the ECB will also be turning the corner away from aggressive QE implementation. This is why we are seeing resilience in the euro against the greenback, pound, yen, loonie, etc.

EUR/USD 4H Chart 6/2
eurusd 4h chart 6/2
(click to enlarge)

Now, before we get too excited about this euro-resilience, let’s be clear that overall, the ECB is still relatively much more dovish than the Fed. The FOMC is after all planning to raise rates, with most central bank watchers forecasting a September hike.

Thus, we should keep a lid on the current bullish outlook. The 1.1062-1.11 area will be key. In the 4H chart, we can see that this represents the support area of a previous consolidation period, which will now be a key resistance factor to monitor as EUR/USD completes an ABC correction.

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