EUR/USD breaks key support as EU inflation remains stubbornly low

Written by: Crispus Nyaga
November 18, 2020
  • The EUR/USD pair dropped below a key support after Eurostat released weak inflation data.
  • Ongoing EU budget dispute has also lowered sentiment on the euro.
  • US building permits remained unchanged in October while housing starts bounced back.

The EUR/USD price reversed earlier gains as market participants reacted to low European inflation, budget crisis, and America’s housing starts data. It is trading at 1.1867, which is a few pips below the intraday high of 1.1890.

EUR/USD falls after weak EU inflation

European Union struggling with low inflation

Consumer prices in Europe remained stubbornly low in October as most countries continued to battle the new wave of the virus.

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According to Eurostat, consumer prices dropped by an annualised rate 0.3% in October, in line with analysts estimates. On a monthly basis, the prices rose by 0.3%, a small improvement from the previous month’s increase of 0.1%.

The core CPI, which strips food and energy rose by 0.2% in October, leading to an annualised increase of 0.2%. The two were in line with what analysts were expecting.

The biggest contributors to inflation were food, alcohol, and tobacco, whose prices rose by 0.38%. These were followed by services and non-energy industrial goods. Energy was the biggest laggard, falling by 0.81%.

The lagging inflation in Europe is mostly because of the high unemployment rate in most countries. It is also because many countries have recently slashed the value-added tax (VAT) to stimulate the economy.

In addition to inflation, the EUR/USD also reacted to the ongoing divisions in Europe about budget. Earlier this week, Hungary and Poland vetoed EU’s budget because of the governance clauses inside the bill. This puts the bloc’s general budget and the recently-passed 750 billion EU recovery fund billat risk.

US housing starts data

The EUR/USD also released mixed economic data today. According to the Mortgage Bankers Association, mortgage applications dropped for the second consecutive week. The applications fell by 0.3% while the mortgage refinance index dropped from 3,973 to 3,901.

Further data by the Census Bureau showed that US housing starts rose from 1.459 million in September to more than 1.530 million in October. The median estimate by analysts was 1.46 million. In addition, building permits remained unchanged at 1.545 million.

These numbers came a day after the bureau released disappointing US retail sales numbers. The sales rose by 0.3% in October, a sharp decline from the previous month’s increase of 1.6%. In the same period, core retail sales rose by 0.2% after rising by 1.2% in September.

EUR/USD technical outlook

EUR/USD technical chart

The EUR/USD erased earlier gains after the disappointing EU inflation data. It is trading at 1.1867, which is 0.35% below the intraday high of 1.1890. On the hourly chart, the pair has dropped below the ascending black trendline. The 14-day and 28-day Hull moving averages have also made a bearish crossover.

This is a sign that the recent strong rally could be ending, which could see the pair continue pushing lower to the next support at 1.1842 and then 1.1814. However, there is also a risk that the pair has made a false breakout, which could see it bounce back and continue rallying. So, if you are a new trader, consider practicing with a forex demo account and learn how to reduce the risks of false breakouts.