Trendline Break and Rate Expectations Climb to 3.75%

EUR/USD news and analysis

• EUR/USD decline gains pace on more resilient PPI data and hawkish Fed comments
• Technical update: EUR/USD downside gaining traction
• Euro sentiment data, FOMC minutes and US consumer sentiment next week
• The analysis in this article makes use of chart pattern and key support and resistance levels. For more information, see our comprehensive educational library

In yesterday’s update, I highlighted the potential for a bearish breakdown of trendline support amid dovish comments from ECB Governing Council member Fabio Panetta. Referring back to the incredibly consistent message presented at the January ECB meeting, Panetta explained that the risk of excessive tightening remains, alluding to better-than-expected financial conditions observed months ago. But despite the rather dovish comments, money markets have priced in a final ECB rate of 3.75% for the first time – meaning the ECB has another 125 basis points of interest rate hikes ahead of it.

Source: Refinitiv

Panetta’s comments are in stark contrast to what we heard from Fed officials yesterday. Lorretta Mester left the door open for a 50 basis point hike in March, while ultra-hawk James Bullard admitted he voted for a 50 basis point hike in January and sees reason for more hikes.

Due to divergent messages from the ECB and Fed, the PPI print mirrored the sentiment of the recent CPI print – which revealed slowing disinflation but disinflation nonetheless. The PPI came in at 0.7%, beating forecasts of 0.4%.

EUR/USD Technical Update: Bearish break gaining traction

Yesterday’s price action closed right on the trendline support, which has now turned back into resistance. The question has always been whether the bearish move would provide the momentum needed for a continuation, and admittedly it’s too early to tell, but early signs seem to support that assumption.

In breakout situations, it is often prudent to watch for a return to resistance before evaluating a bearish continuation thereafter. Support stands at 1.0615 heading into the weekend followed by 1.0450 support zone. Resistance becomes diagonal trendline followed by 1.0805. The MACD indicator is suggesting that the momentum is in favor of bears and the RSI shows that the market is far from oversold leaving further room to the downside.

EUR/U.S. dollar daily chart

Source: TradingView, created by Richard Snow

Major risk events ahead

There is little planned event risk today, with the main attraction being comments from the Fed’s Barkin, who normally skews slightly to the hawkish side, but less so than Mester and Bullard.

Data will be hot next week with final EU and German inflation data for January, updated US and Germany GDP data for Q4, US PCE inflation data along with FOMC minutes and EU sentiment numbers. Judging by the Fed’s recent comments, the minutes may confirm a more hawkish stance from prominent members of the rate-setting committee – who support the dollar’s rise.

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— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX