Where we are: EUR/USD is trading around 1.0785, having drifted lower in early European trade. The pair remains below the 1.08 handle after failing to sustain a rally overnight, trading in a narrow range. This is slightly below yesterday’s New York close.
What’s driving it: The dominant driver for the Euro remains the anticipation surrounding this morning’s US CPI print. While the ECB cut rates by 25bp to 2.50% at its last meeting, maintaining a mild easing bias, a hot US CPI could significantly curtail further ECB action by driving up the dollar and imported inflation. Frank Elderson’s speech earlier today, focusing on deeper integration for boosting prosperity, hasn’t provided any immediate support to the Euro. Domestically, Eurozone HICP remains at 2%, with Core at 2.3%, hardly giving the ECB cause for concern but lagging the US on an equivalent basis.
- ECB cut rates 25bp last month, but is proceeding cautiously.
- US 10Y Breakeven Inflation is creeping up to 2.47%, putting pressure on the ECB’s dovish stance.
- Speculator positioning in the Euro is modestly long (3.9% of OI) but not at an extreme, reducing short-squeeze potential if the CPI comes in soft.
NY session focus: All eyes are on the 08:30 ET US CPI release. Forecasts point to a 3.7% YoY increase, with Core at 0.3% m/m. A higher-than-expected print will likely send EUR/USD below 1.0750, potentially testing the 1.07 level. Conversely, a soft print could fuel a rally towards 1.0850. Traders should also monitor the 11:59 ET Fed Chair Nomination Vote. The trade that’s working is shorting EUR/USD on rallies. The trade at risk is being long EUR/USD ahead of the CPI data. The pain trade is a weak CPI print coupled with dovish commentary from the Fed nominee, triggering a significant short squeeze in the Euro.