The US dollar returned to its strong upward trajectory amid increasing expectations of the chances of raising US interest rates strongly during 2022. Accordingly, this was a good reason for the EUR/USD pair to decline strongly below the 1.0500 support. As I mentioned before that stability below it will support further collapse to the bottom. The euro’s losses reached the level of 1.0435, which is stable around it in the beginning of trading today, Thursday.

Data from Germany suggests that peak inflation may have passed, lowering eurozone bond yields and euro exchange rates, but there was a partial reversal after Spain’s inflation numbers came in higher than expected. This is an early indication that perhaps the worst of the current inflation spike may have passed and will ease pressure on the European Central Bank to adopt an aggressive rate hike approach.

Commenting on this, Matthias van der Geogt, analyst at KBC Markets says: “European yields and the euro fell after the release of Germany’s first regional CPI reading for June.” It adds to the summer consolidation/correction phase in the bond markets. It also indicates that the EUR/USD could be limited to 1.0350/1.0642 instead of 1.0350/1.08.” “The CPI data for North Rhine-Westphalia (NRW), the most populous federal state in Germany, indicates a much lower reading, which may have been driven by the recent drop in oil prices,” says Tulia Boko, an economist at UniCredit Bank. . And if the NRW data were reversed by other federal states, whose numbers were released later in the morning, the nationwide inflation reading could be only around 7%.

Overall, the European Central Bank is poised to raise interest rates in July and again in September as it grapples with rising inflation, triggering a policy shift that boosted bond yields in the euro zone and provided a floor under the euro. The magnitude and number of spikes received is important to the EUR exchange rates: a 50bp move is seen as a strong commitment to normalization and likely to support the EUR, all else being equal.

But weak inflation readings may encourage a more cautious 25 basis point rate hike, which would disappoint current market expectations for a more aggressive reaction. It may also indicate that the ECB may not make as many rallies over the coming months as the market had been expecting.

Indeed, prior to the data release, markets were pricing as high as 30 basis points from the gains for July, indicating that the prospects for a 50 basis point lift were on edge. As of June 13, the market was expecting a peak in the ECB deposit rate at 2.48%, but it has since fallen back to 2.04% as of June 27 and we expect the latest reading to be lower.

Taming rate hike expectations will trigger a mechanical bearish response in the Euro, as seen in midweek trading. However, don’t expect a complete capitulation for the Euro just yet: Spanish CPI inflation was released hours after German numbers were released higher than expected. The annual figure for May came in at 10.2%, higher than the expected 9.0% and previously announced 8.7%. This is more reactionary than the NRW data in time, but nevertheless the ECB must ensure that its current course is maintained.

EUR/USD forecast today:

Bears control over the EUR/USD pair increased by surpassing the support level of 1.0500 as mentioned in the recent technical analyzes. Currently the closest support levels for the pair are 1.0420 and 1.0380, and from the last level, the technical indicators will move towards oversold levels. The most appropriate resistance levels for the rebound will be above 1.0620 and 1.0800, respectively. The Euro is awaiting the release of German unemployment data and the unemployment rate in the Eurozone. The US dollar is on a date with the announcement of the reading of the personal consumption expenditures price index, the average income and spending of the American citizen, and the weekly jobless claims.

I still prefer to sell EUR/USD from every bullish level and the most notable current highs are 1.0785, 1.0830 and 1.0900 respectively.

Despite the successive statements by the monetary policy officials of the European Central Bank and the record European inflation figures that support the hints of these statements, the price of EUR/USD was exposed to profit-taking operations from the resistance level 1.0786 to the support level 1.0680 before settling around the 1.0730 level at the time of writing the analysis.

Inflation rates in Europe jumped stronger than markets once again when it rose to new highs for the month of May, proving in the process a shift in the current monetary policy stance at the European Central Bank (ECB) but also likely to add fuel to an already spirited debate. Yesterday’s Eurostat figures suggested Europe’s headline inflation rose from 7.5% to 8.1% this month, echoing increases announced in France and Germany during the previous session while topping the market consensus that had been eyeing annual price growth to just 7.7%.

This was higher than some professional forecasters had expected even after taking into account Monday’s numbers from Germany and France. However, core inflation has risen by a smaller percentage, with the annual rate rising from 3.5% to 3.8% and in the process indicating the significant extent to which price pressures in the Eurozone are driven by largely inorganic and imported factors.

Core inflation removes the volatile prices of mostly imported commodities such as food and energy from the consumer basket, so it is seen as a better representation of domestically generated inflation pressures. Energy prices rose at an annual rate of 39.2% in May, up from 37.5%, although the food, alcohol and tobacco sector saw the second strongest increases from already high levels of inflation when it rose from 6.3% to 7.5%.

Core inflation also overlooks alcohol and tobacco prices.

However, being lower compared to the main gauge of inflation will not be comfortable for the ECB as it is close to twice the level of the identical 2% ECB target and is still rising. According to experts, the main concern is about core inflation. The jump from 3.5 to 3.8% today shows that higher input prices are being paid to the consumer at a rapid pace. While sales price expectations from companies eased slightly in May, expectations are that the underlying will remain well above target in the coming quarters as input prices continue to rise.

Yesterday’s data justifies the European Central Bank’s December decision to begin steadily changing its monetary policy in the direction of less stimulus calibration, although it also leaves the bank in a bind. That’s because the data is effectively throwing gasoline into an already fiery board debate about how fast it should move forward.

ECB Chief Economist Philip Lane said: “I think it was important for President Lagarde to put in place a roadmap indicating the end of net asset purchases in July and the end of negative interest rates in September. And it is a strong and appropriate decision, although it is too early to know what will happen next, because it will depend on how the economy develops.” He added, “Normalization naturally focuses on moving in 25 basis point units, so 25 basis point increases at the July and September meetings are a reference pace. In a conversation with Nuño Rodrigo and Laura Salces, he added that any discussion of further moves would have to prove to move more aggressively from this sequence of rallies in July and September.

According to the technical analysis of the pair: Yesterday’s performance confirms the correctness of our expectation that the price of the euro currency pair against the dollar EUR/USD is subject to profit-taking operations at any time. The factors of the US dollar’s ​​strength continue for a longer period and the date for the European Central to raise interest rates is not soon and the continuation of the Russian-Ukrainian war will continue hinder the euro’s future gains. I still prefer to sell EUR/USD from every bullish level and the most notable current highs are 1.0785, 1.0830 and 1.0900 respectively.

On the other hand, according to the performance on the daily chart below, the bears’ control will be strengthened if the support levels 1.0650 and 1.0540 are breached, respectively.