Euro Forecast, EUR/USD, EU Bonds Yields, US CPI – Talking Points

  • Euro supported from rising EU bond yields amid sovereign debt rout
  • US CPI inflation report due out tonight threatens EUR/USD rally
  • Technical outlook sees bullish signal but pullback not off the cards

The Euro is taking a breather versus the US Dollar after making an impressive run higher. European sovereign debt is finally seeing an exodus, with German Bunds and Italian government bonds under heavy selling pressure over the last week. Rate traders are pricing in nearly 40 basis points of hikes for the European Central Bank (ECB) by December 2022, according to overnight index swaps (OIS). That is likely the driver behind the EU bond selloff, pushing rates higher.

Markets may be overestimating the outlook on rate hikes, but a 10-basis-point increase later this year is almost certainly in the cards. That would be the first rise for the Eurozone since 2011, when the ECB took a lot of criticism for pulling the trigger too early. Indeed, many would argue that was a policy mistake, but a rate liftoff this year may be prudent given the macro landscape. The economy is humming, the Omicron threat seems nearly passed, and much of the European Union’s political infighting has receded.

That is all a boon for the Euro. As government bond yields cross above and pull away from the zero mark, Europe’s foreign capital investment is likely to increase. That may provide the single currency with an additional tailwind, as many firms are restricted from investing in negative-yielding debt. Currently, the 10-year German Bund yield is just above the 0.20% level, the highest since January 2019 before the Covid pandemic that threw financial markets into chaos.

However, EUR/USD faces two potent near-term risks factors: tonight’s US inflation report and the situation on the Ukrainian border. The United States consumer price index (CPI) is expected to cross the wires at 7.3% on a year-over-year basis. That would be a multi-decade high, and an even hotter print has the potential to boost already hawkish rate hike bets for the Federal Reserve. That could induce a runup in the US Dollar. Meanwhile, a potential Russian incursion into Ukraine could inject major volatility into global markets, particularly in Europe. That may also boost the Greenback, given its haven appeal.

EUR/USD Technical Forecast

EUR/USD is up over 1.5% since February 1, making it one of the best-performing G7 currencies this month. Prices are in line with the falling 50-day Simple Moving Average after falling from the 61.8% Fibonacci retracement level, an area that has previously capped upside progress in January.

Bulls would need to pierce above that level to push into fresh yearly highs. A Bull Flag pattern suggests price may see another sharp move higher if they manage to break above the pattern’s resistance. Alternatively, a move below Flag support could open the door for prices to retrace gains from the January swing low.

EUR/USD 8-Hour Chart

eurusd bull flag, euro, europe currency

Chart created with TradingView

— Written by Thomas Westwater, Analyst for DailyFX.com

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