Traders Brace for ECB

EURUSD is kicking off the week with no clear directional signal as traders brace for the ECB meeting on Thursday. Markets had been heavily expecting the ECB to cut rates this month, in line with the fall in inflation, weaker economic signals and dovish ECB commentary. However, last week’s hotter-than-forecast eurozone CPI reading has cast some uncertainty ahead of the meeting. The flash eurozone CPI estimate for last month came in at 2.9% on the core reading, up from 2.7% prior and expected while the headline reading came in at 2.7% up from 2.4% prior and above 2.5% expected.

Inflation Ticks Highs

With inflation seeing a fresh spike, traders are now debating whether the ECB will push ahead with signalled easing. The risk for the ECB is that if inflation is beginning to track higher again, a cut at this juncture could exacerbate inflationary pressures, leading to a situation where the bank has to tighten to reverse the impact. On the other hand, if the bank holds off from cutting, it will weaken its credibility in traders’ eyes, reducing the impact of its guidance and verbal interventions.

Upside Risks for EUR

In light of the inflationary uptick, risks are skewed towards the bank holding rates steady for longer to see that inflation turns down again. If the bank does cut this week, it’s likely to come with a hawkish message downplaying expectations for a faster pace of easing. As such, EURUSD looks prone to upside risks this week particularly if we see any weakness in incoming US data.

Technical Views

EURUSD

The rally in EURUSD which saw price breaking above the local triangle pattern has stalled for now. To the topside, focus will be on a test of resistance at the 1.0937 level, with the bear channel highs coming in above. To the downside, 1.0724 is the key support to watch.