The EUR/USD declined as traders reacted to the latest EU inflation numbers ahead of Congressional testimony by Jerome Powell and US consumer confidence data.
EU inflation rising
Eurozone consumer inflation continued to rise in January even as countries placed travel restrictions. According to Eurostat, the headline consumer price index (CPI) rose by 0.9% in January from -0.3% in the previous month. This was the highest figure since March last year. It was also the first time it turned positive since the pandemic started.
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Similarly, the core CPI rose by 1.4% in January from the previous 0.2%. This was in line with the flash data released a few weeks ago. It was also the highest figure since 2013. According to Eurostat, the return of inflation was mostly because of supply shortages and bottlenecks. These shortages were due to Brexit and the measures put in place by countries to contain the disease.
Analysts expect that inflation will continue rising as countries recover. This will put more pressure on the European Central Bank (ECB) to intervene. It could do this by hiking interest rates and tapering its asset purchases. In a note, analysts at ING said:
“Looking ahead, for eurozone inflation, the only way is up. In fact, there will be a series of one-off factors pushing up headline inflation. But when economies reopen, price markups in sectors most hit by the lockdowns will also add to upward pressure on inflation.”
Looking ahead, the EUR/USD will react to the latest US consumer confidence data that will come out later today. Economists believe that the confidence rose in February as the US continues to administer the vaccine. Already, more than 40 million Americans have received a dose of the vaccine.
Most importantly, the pair will react to testimony by Jerome Powell, the Fed chair. In it, he will likely be asked about the recent action in the Treasuries market and what the bank plans to do. Recently, US yields have been rising as traders start pricing-in higher inflation.
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EUR/USD technical outlook
The EUR/USD rose to an intraday high of 1.2180 and then pulled-back after the EU inflation numbers. It is trading at 1.2160, which is slightly above the middle line of the Bollinger Bands. It remains above the ascending green trendline. Therefore, the pair will remain in an uptrend so long as it is above the middle line of the Bands. A move below this level will see bears attempt to retest the support at 1.2100.