EUR/USD rises as eurozone inflation drifts further from ECB target

EUR/USD rises as eurozone inflation drifts further from ECB target
  • The EUR/USD pair rose after Eurostat released weak inflation data from Europe.
  • The data came a day after it released weak construction numbers.
  • The inflation is significantly below the ECB target of 2.0%

The euro index was rose slightly after inflation in the eurozone dropped to the lowest level since 2016. The EUR/USD pair rose by 0.23 per cent while the EUR/GBP rose by 25 basis points. The EUR/JPY rose by 0.14 per cent while the EUR/SEK was little changed.

EUR/USD
EUR/USD rises on weak inflation data

European Union inflation falls

Inflation in the eurozone slowed to the lowest level in more than four years and further diverged from the ECB target of 2.0 per cent.

Headline consumer prices rose by 0.3 per cent in April year on year mostly due to the coronavirus-related lockdowns. A year ago, the headline CPI was 1.7 per cent. In April alone, the CPI rose by 0.3 per cent.

The core CPI, which excludes the volatile food and energy prices rose by 0.9 per cent YoY and 0.7 per cent MoM. In the same month, consumer prices, excluding tobacco, rose by just 0.2 per cent.

Consumer prices in the eurozone have remained stubbornly low despite measures by the ECB to stir spending. For example, the bank has maintained negative interest rates for years.

According to Eurostat, the lowest growth in consumer prices was in Slovenia, Cyprus, and Estonia, where prices fell by 1.3 per cent, 1.2 per cent and 0.9 per cent respectively. This decline was partially offset by an increase in Czechia, Poland, and Hungary, where prices rose by more than 2 per cent. The report said:

“In April, the highest contribution to the annual euro area inflation rate came from food, alcohol & tobacco (+0.67 percentage points, pp), followed by services (+0.52 pp), non-energy industrial goods (+0.09 pp) and energy (-0.97 pp).”

This data came a short while after the Office of National Statistics (ONS) released weak inflation numbers from the UK. As a result, the UK sold bonds at negative interest rates for the first time on record.

CPI adds to a series of weak economic data

The weak inflation data adds to the previous weak economic data from the eurozone. Just yesterday, data from Eurostat showed that construction output dropped by 14.1 per cent in March. This was the worst performance since 2013 when the region was going through a debt crisis. Civil engineering fell by 16 per cent while building construction fell by 14 per cent.

Last week, data by Eurostat showed that the eurozone had moved into a recession while manufacturing and services PMI have sunk.

Still, there are signs that the landscape is changing. Most countries have started to reopen, and the overall number of coronavirus cases have started to fall. At the same time, Angela Merkel and Emmanuel Macron have reached a financing agreement.

The biggest threat to the region is the conflict between Germany and the European Commission and the risks presented by Brexit.

EUR/USD technical outlook

EUR/USD
EUR/USD technical forecast

The EUR/USD pair is trading at 1.0950, which is slightly lower than yesterday’s high of 1.0975. On the daily chart, this price is along the 100-day exponential moving average and slightly above the 50-day EMA. The price is also between the 50% and 38.2% Fibonacci retracement level. The volatility, as measured by the Average True Range (ATR) has fallen to the lowest level since March. Therefore, the pair will likely breakout in either direction as the market wait for a catalyst.

By Crispus Nyaga
Crispus Nyaga is a finance analyst and trader with more than 7 years industry experience. He's contributed to some of the leading financial brands in the world including Seeking Alpha, MarketWatch, Forbes, and Investing.com. Crispus has an excellent understanding of global macroeconomic and geopolitical issues, is a big fan of golf, and lives in Nairobi with his wife, son, and nephew.
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