EUR/USD outlook as EU inflation sinks to 2016 low

The EUR/USD pair declined slightly today as investors digested the latest economic data, earnings results, and coronavirus headlines. A significant mover for the euro was the March inflation data released by Eurostat.

EUR/USD falls after weak CPI data

According to Eurostat, annual inflation in the euro area dropped to 0.7 per cent in March, down from 1.7 per cent in the previous month. This was the lowest it has been since December 2016. The rate was 1.4 per cent in the same month in 2019. The decline in headline prices was in line with what analysts polled by Bloomberg were expecting.

The annual inflation in the European Union dropped to 1.2 per cent in March from 1.6 per cent a month before. Consumer prices rose the highest in Hungary, Poland, and Czechia, where they rose by 3.9 per cent, 3.9 per cent, and 3.6 per cent. They were offset by weakness in Spain, Italy, and Portugal, where prices rose by just 0.1 per cent.

The core CPI, which excludes the volatile food and energy products, dropped to an annualized rate of 1.0% from the previous 1.2 per cent. It was the lowest it has been since August last year.

The biggest contributors to inflation were services, food, alcohol and tobacco, and non-energy industrial goods. They were offset by a fall in energy prices.

European coronavirus crisis

These numbers comes at a time when the European Union is addressing its biggest crisis in decades. The coronavirus pandemic has killed thousands of people and decimated economies like Italy and Spain. Early this month, data showed that manufacturing PMI in Italy dropped to below 20, which was an unprecedented level. Other European countries are not doing better either, which has affected the EUR/USD pair.

Other sectors of the European economy are struggling. Data released a few days ago by Eurostat showed that industrial production declined by 0.1 per cent in February. Another report showed that most countries in the bloc, including Germany, would face their worst recession in decade.

The coronavirus crisis has also placed the region to a fiscal crisis. Last week, the region’s leaders agreed to spend the 500 billion euros European Stability Mechanism (ESM) fund. According to analysts, while the decision was a good one, it also exposed the region to a new debt crisis. In an interview with the Financial Times, Emmanuel Macron said:

“We are at a moment of truth, which is to decide whether the European Union is a political project or just a market project. I think it’s a political project. We need financial transfers and solidarity, if only so that Europe holds on.”

European countries reopening

There are some positive signs that the European Union is winning the fight against the coronavirus. The number of infections in most countries has started to drop. Just yesterday, Germany announced that it would start to reopening the economy by allowing schools and some shops to operate. Spain and Italy have also started to ease movements.

While these are positive signs, there are concerns about more coronavirus infections coming up. In fact, the number of coronavirus-related deaths and infections have started to rise in Spain, a week after it eased movements.

The US keeps getting worse

Meanwhile, data from the United States has been disappointing. Just yesterday, the country reported that more than 5 million people enrolled for unemployment benefits in the previous week. This means that more than 22 million Americans have lost their jobs in the past 30 days alone. In contrast, the American economy added slightly above 22 million jobs from 2009 to February this year.

On Wednesday, data from the US showed that retail sales dropped by 8.7 per cent in March. Similarly, another data from New York Fed showed that the state’s industrial production dropped to the lowest level since 1994. Another number from the Fed showed that manufacturing production dropped to the lowest level since 1946.

This adds to other negative numbers, including a rise of unemployment rate, falling wages, problems in the housing market, and fewer working hours.

Fortunately, a study by the University of Chicago showed that a drug manufactured by Gilead Sciences is working to cure the disease. A cure could help stabilize the financial market and boost trade.

EUR/USD technical outlook

On the two-hour chart, the EUR/USD pair has been falling after reaching a high of 1.0990 on Wednesday. The pair has managed to move below the Ichimoku cloud. It has also moved below the 78.2 per cent Fibonacci retracement level while the RSI is dropping. This means that the pair may continue falling as it attempts to test the support at 1.0765.