EUR/USD Vulnerable to Further Losses on Rising U.S. Inflation

– U.S. Core Personal Consumption Expenditure (PCE) to Uptick to Annualized 1.6% in February. Personal Income to Increase 0.4% During the Same Period.

– EUR/USD Fails to Retain Bullish Sequence. March Range in Focus Following Failed Attempt to Test 2018-High (1.2556).

Trading the News: U.S. Personal Consumption Expenditure (PCE)

A pickup in the core U.S. Personal Consumption Expenditure (PCE), the Fed’s preferred gauge for inflation, may fuel the recent decline in EUR/USD as it boosts bets for four rate-hikes in 2018.

Data prints pointing to faster price growth may spark a bullish reaction in the greenback as it encourages the Federal Open Market Committee (FOMC) to implement higher borrowing-costs over the comings months, and the central bank may adopt a more hawking tone at the next meeting on May 2 as ‘inflation on a 12-month basis is expected to move up in coming months and to stabilize around the Committee’s 2 percent objective over the medium term.’

However, a below-forecast print may generate near-term headwinds for the greenback as it dampens the scope for an extended hiking-cycle, and Chairman Jerome Powell and Co. may continue to project a neutral Fed Funds rate of 2.75% to 3.00% as ‘market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.’

Impact that the U.S. PCE report had on EUR/USD during the previous release

January 2018 U.S. Core Personal Consumption Expenditure (PCE)

EUR/USD 5-Minute Chart

The core Personal Consumption Expenditure (PCE) held steady at an annualized 1.5% for the third consecutive month in January, while the gauge for Personal Income increased 0.4% during the same period amid forecasts for a 0.3% print. At the same time, Personal Spending increased 0.2% after expanding 0.4% in December, while a separate report showed Initial Jobless Claims unexpectedly narrowing to 210K in the week ending February 24 from a revised 220K the week prior. Even though the mixed data prints produced a limited reaction in EUR/USD, the pair gained ground throughout the North American trade to end the day at 1.2267.

EUR/USD Daily Chart

• Broader outlook for EUR/USD remains constructive as price and the Relative Strength Index (RSI) continue to track the upward trends carried over from late last year, but the near-term advance appears to have stalled ahead of the 2018-high (1.2556), with the pair at risk of a larger pullback as it snaps the recent string of higher highs & lows.
• Failure to hold above the 1.2430 (50% expansion) region keeps the March range on the radar, with the first downside hurdle coming in around 1.2230 (50% retracement) followed by the 1.2140 (50% retracement) region, which sits just beneath the monthly-low (1.2155).

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— Written by David Song, Currency Analyst

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