Yesterday, the market found out that the annual rate of the US CPI leaped to 7.5% in January from 7.0% in December, the highest figure since February 1982, and above the 7.3% expected. The euro currency initially burst into a rapid rally amid growing expectations of grave economic risks to be entailed by raging consumer inflation.
However, a couple of hours later, the euro sharply reversed. As a result, EUR/USD dropped below the levels where it was trading before the publication of the inflation data. There are two weighty reasons for such price action.
First, risks for the economy do not contradict the Fed’s focus on monetary tightening. Moreover, they serve as an extra argument favoring aggressive monetary tightening, including raising interest rates. Thus, market participants are pricing in the rate hike by 0.50% at a time in March.
Second, having digested the US inflation data, market participants eventually turned attention to remarks by Christine Lagarde that she made roughly when the inflation data was released.
The ECB President stated that aggressive monetary tightening would inevitably negatively impact the economy. It means that the European regulator finds it too early to raise interest rates in the foreseeable future.
So, there is a slim chance that the ECB will increase interest rates this year. Not long ago, such prospects were a strong market catalyst in the currency market that pushed the US dollar down.
The bottom line is that the Federal Reserve is to embark on the cycle of monetary tightening soon, intending to raise rates at a rapid pace. Unlike the Fed, the ECB is procrastinating to take action.
EUR/USD aroused strong speculative interest amid the high-impact economic data. As a result, the currency pair made sharp price swings that ended up with a breakout of the lower border of the trading range between 1.1400/1.1480 on the 4-hour chart.
The RSI technical instrument crossed the 50 level downhill. It is a sell signal confirmed by a breakout of the lower border of the range-bound market. The Alligator indicator intersects with moving averages on the 4-hour chart that suggests completing the bullish cycle.
The daily chart indicates that an upward correction from a local low of the downtrend is ending.
Outlook and Trading Tips
Under such market conditions, if EUR/USD settles firmly below 1.1400, the sellers will have a higher chance of pushing the pair into a downtrend following the upward correction.
Complex indicator analysis generates a sell signal for intraday and short-term trading, given a breakout of the lower border.
