The EUR/USD pair will have numerous catalysts on Wednesday although their impacts will be limited. Spain will publish its final estimate of January’s inflation figure.
Bearish view
- Sell the EUR/USD pair and set a take-profit at 1.066.
- Add a stop-loss at 1.080.
- Timeline: 1-2 days.
Bullish view
- Set a buy-stop at 1.0765 and a take-profit at 1.0825.
- Add a stop-loss at 1.0680.
The euro drifted downwards against the US dollar as traders assessed the impact of the stronger-than-expected inflation numbers. The EUR/USD pair first rose to a weekly high of 1.0800 and then quickly erased those gains to trade at 1.0725.
Risk-off sentiment sets in
The euro to USD price retreated as a risk-on sentiment set in in the market. This view happened after the strong American inflation numbers. On a positive side, America’s inflation dropped slightly on a year-on-year basis. It moved from 6.5% in December to 6.4% in January. However, on the other side, inflation moved up slightly on a month-on-month basis.
Therefore, with the labor market being too tight, expectations are that the Fed will maintain a hawkish tone. This explains why the US dollar index remained above $103 while American indices like the Dow Jones and S&P 500 declined.
On the other hand, some analysts are optimistic that inflation is actually ticking in the right direction. In a note, analysts at ING noted that core inflation rose by just 0.2% on a MoM basis. If this trend continues, they believe that the YoY figure will move closer to 2% later this year. As such, they reiterated that the Fed will be forced to cut interest rates in the fourth quarter.
The EUR/USD pair will have numerous catalysts on Wednesday although their impacts will be limited. Spain will publish its final estimate of January’s inflation figure. With natural gas falling, expectations are that inflation pulled back for the second straight month. The EU will also release the latest industrial production data.
The most important data will be the upcoming US retail sales numbers. After being in the red for a few months, analysts expect that retail sales rebounded by 1.7% in January. While these numbers are important, their impact will be limited coming after inflation figures.
EUR/USD forecast
Fundamentally, the inflation figures published on Tuesday are supportive of the US dollar. On the 4H chart, the EUR/USD pair has formed two important bearish patterns. It created a doji pattern, which is a sign of a reversal. Also, the pair has formed a double-top pattern at 1.0795. This pattern is usually a bearish sign.
On the other hand, it has also formed a broadening bottom, which is a bullish signal. Therefore, in the immediate short term, it will likely retreat to retest the lower side and then bounce back in the coming days.
