EUR/USD price forecast amid euro area annual inflation dropping to 9.2%

on Jan 9, 2023
  • EUR/USD consolidates below horizontal resistance
  • Euro area annual inflation dropped to 9.2% in December, well below the market consensus
  • On a move above 1.08 there is no meaningful resistance until the 1.10 area

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Last Friday, while everyone waited for the Non-Farm Payrolls report to be released in the United States, one piece of economic data from Europe mattered more for euro traders. That is, the CPI Flash Estimate YoY, which declined in December.

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High inflation sparked cost-of-living crises throughout the advanced economies in 2022. It pressured central banks to raise rates aggressively, putting in danger the shallow economic growth.

Despite the war in Ukraine, a wait-and-see approach was not an option for the European Central Bank. Therefore, it raised the key interest rates and plans to do some more of the same at the upcoming meetings.

At the same time, everyone watched the developments in the energy markets. Energy is a big driver of inflation, and a peak in energy prices means inflation will also peak.

Last Friday, traders found the euro area’s annual inflation declined to 9.2% in December. While still well above the ECB target, it shows that inflation may have peaked. Also, the number was well below the 9.6% expected.

So what does it mean for the euro traders, and, in particular, for the EUR/USD exchange rate?

EUR/USD faces resistance while in a bullish channel

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EUR/USD bounced from the lows last October with the US equity markets. A tight direct correlation exists between the two; thus, the positive sentiment from the US equity markets translated into a bullish EUR/USD trend.

From a technical perspective, the currency pair keeps forming a series of higher highs and higher lows, corresponding to a bullish trend. Also, it evolves in a rising channel, albeit it consolidates now below horizontal resistance.

Technical traders should watch for the market to form a continuation pattern below resistance. Right now, it appears that the EUR/USD might form an ascending triangle as it struggles against horizontal resistance.

A clear break above 1.08 should push the exchange rate higher, with no resistance seen until 1.10 and above. Such a break, however, should not come only on the back of a hawkish ECB but, most likely, on the back of a weak US dollar.


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