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Rising Inflation Puts Pressure on the European Currency

8/19/2022 1:59 PM

This week the EUR/USD pair corrected downwards and is now trading around 1.0080, being under pressure from negative inflation data.

In July, the Consumer Price Index in the euro area on an annualized basis rose from 8.6% to 8.9%, and the Core CPI rose from 3.0% to 4.0%. In turn, the German Producer Price Index corrected from 32.7% to 37.2% over the same period. The increase in inflationary pressure in the European economy continues to be provided by an increase in tariffs for electricity and food. Unlike the US, where the rate slowed down somewhat in July, the negative dynamics in the eurozone is only accelerating, which leaves the European Central Bank (ECB) with no other options but to make a new adjustment in interest rates, increasing the risks of a recession in the economies of the region. Regulator board member Isabel Schnabel said that the inflation situation has not improved since the beginning of monetary tightening, which means that the ECB is likely to continue its "hawkish" policy.

Unlike the euro, the US dollar currently looks more attractive to invest, although the US economy is also facing problems. The labor market continues to successfully withstand the pressure of rising interest rates, which, according to the minutes of the last meeting of the Federal Open Market Committee of the US Federal Reserve (FOMC), will continue to rise for a long time. In turn, macroeconomic data published this week raised serious concerns among investors about the state of the construction market: in July, the number of Building Permits decreased by 1.3%, the volume of Housing Starts declined by 9.6%, and Existing Home Sales decreased by 5.9%. Experts have already started talking about the possibility of a recession in the construction sector. Nevertheless, in general, the position of the US economy looks much stronger than the position of the European one, due to the absence of serious problems with a lack of energy resources.

The price dropped below 1.0131 (Murray [3/8]), which gives the prospect of further declines towards 1.0009 (Murray [2/8]) and 0.9887 (Murray [1/8]). The key for the "bulls" seems to be the resistance zone of 1.0200–1.0253 (the center line of Bollinger Bands, Murray [4/8]), the breakout of which will give the prospect of growth to the levels of 1.0376 (Murray [5/8]), 1.0500 (Murray [6/8]), 1.0620 (Murray [7/8]). This move seems less likely, as technical indicators point to a continued decline: Bollinger Bands are reversing downwards, MACD is increasing in the negative zone, and Stochastic is directed downwards, but has entered the oversold zone.

Resistance levels: 1.0253, 1.0376, 1.0500, 1.0620. | Support levels: 1.0009, 0.9887.

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