EUR/USD pulls back as the ECB prepares for new inflation policy

EUR/USD pulls back as the ECB prepares for new inflation policy
Written by:
Crispus Nyaga
2nd October, 04:45
  • The EUR/USD pair declined in early trading as investors waited for preliminary EU inflation data.
  • Yesterday, Christine Lagarde revealed that the ECB was considering changing its inflation target.
  • The pair is also falling ahead of US nonfarm payroll data.

The EUR/USD is down by 0.25% as investors wait for the preliminary inflation data from the Eurozone and the US nonfarm payroll data. The pair is trading at 1.1715, which is a few pips below yesterday’s high of 1.1770.

EUR/USD turns lower ahead of EU CPI data

Eurozone inflation data

The Eurozone has made a steady recovery in the past few months. In general, most countries have reopened and the number of Covid-19 cases has been relatively stable. Business activity in most cities and towns has been relatively strong. Retail sales have jumped and the important manufacturing sector has rebounded. This is evidenced by the strong PMI data released yesterday.

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However, consumer prices have been weak, posing the threat of deflation. Today, Eurostat will release the preliminary reading of consumer price index from the region. Analysts polled by Reuters expect the data will show that the headline CPI dropped by 0.2% in September. That will be the second consecutive month that the CPI has come out negative.

The CPI data will come a day after Christine Lagarde hinted that the ECB was following Federal Reserve’s lead. In a major shift, she said that the bank will allow the rate of inflation to overshoot its target of 2%. This means that the bank will retain low interest rates even when this target is reached. As such, the low rate environment will remain for several more years.

In the past, the ECB and the Fed tends to hike rates whenever inflation rises to 2%. The goal of such measures is usually to prevent the economy from overheating. She said:

“If credible, such a strategy can strengthen the capacity of monetary policy to stabilise the economy when faced with the lower bound. This is because the promise of inflation overshooting raises inflation expectations and therefore lowers real interest rates.”

The EUR/USD is also falling as traders wait for the nonfarm payroll data from the United States. Analysts polled by Reuters expect the data to show that American economy added more than 850k jobs in September while the unemployment rate fell to 8.2%. They also see wages rising by about 4.8%. On Wednesday, data from ADP showed that private employers added more than 429k. And yesterday, data showed that initial jobless claims fell to the lowest level in months.

EUR/USD technical outlook

The EUR/USD pair reached a high of 1.1770 yesterday. Today, the stronger US dollar has pulled the pair down to 1.1715. On the four-hour chart, the price is along the middle line of the Donchian channel. It is also slightly above the 23.6% Fibonacci retracement level. Therefore, I suspect that the pair will likely continue falling as bears aim for moves below 1.1700.

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