EUR Lower on Monday

EURUSD is starting the week on a softer footing as traders digest the recent downturn in eurozone inflation and some dovish commentary from ECB chief Lagarde. Last week, flash headline eurozone CPI was seen cooling to 2.8 from 3.2 prior, below the 3% the market was looking for. This marked the lowest CPI reading since February and despite still being way above the ECB’s 2% target, is at least a strong sign that CPI is coming back down. Core CPI was similarly lower hitting 2.4% from 2.6% prior.

Lagarde: Risks More Balanced Now

Speaking on the back of the data last week, ECB chief Lagarde defended the bank’s decision to hike rates despite falling inflation. However, Lagarde went on to say that growth and inflation risks appear more evenly balanced now, a strong shift in tone from earlier in the year. As such, traders have begins scaling back their rate hike expectations with pricing for a follow-up hike in September back under the 50% level from as high as 70% previously.  Plunging oil prices have caused a big reassessment across the board and if we see energy prices remain lower, this should bring inflation expectations down accordingly, diluting rate hike forecasts. In this scenario EURUSD is vulnerable to a break lower particularly if the Fed remains more hawkish. Looking ahead this week traders will be watching for any USD spike around the FOMC mins on Wednesday which could see EURUSD breaking to fresh lows.

Technical Views

EURUSD

For now, EURUSD remains below the 1.1490 level and while that’s the case focus is on a fresh push lower with 1.1206 the deeper bear-target to note. Bulls need to get back above the 1.16 level to help shift momentum away from further losses.