Eurozone CPI preview: What to expect of EUR/USD?

The EUR/USD pair met fresh supply just ahead of 1.1150 and now extends the retreat towards 1.11 handle, as the greenback turned positive against its major peers. While a weaker German retail sales print also weighed on the EUR.  The German retail sales dropped 0.9% in April m/m, surprising on the downside as the market had bet on a 0.9% rise. 

Next in focus remains the Eurozone flash CPI estimate for May, scheduled to be published at 09.00GMT later this session.

Eurozone to remain in deflation for a 4th consecutive month

 Eurostat will publish the euro zone's inflation first estimate for May. Consumer prices are expected to show a 0.1% dip on a yearly basis, following the 0.2% drop in April. While the core figures are expected to bounce to 0.8% y/y in May versus 0.7% last. The slower place of declines in the prices, could cause the ECB to remain in a wait-and-see mode at its policy decision due later this week

If the CPI comes weaker-than-expected it would re-ignite speculation of more aggressive ECB action this week, which could send EUR/USD below 200-DMA at 1.1098. On the other hand, a much stronger CPI data could provide the much-needed respite to the bulls; driving EUR/USD towards 100-DMA at 1.1200. 

Analysts at RBS explained, “Specifically, we forecast core inflation to bounce up to 0.8% y/y in May, which is slightly above current market expectations of 0.7%. This is based on unwinding of the effects of unusually weak (volatile) package holiday prices in April, which alone should add about 0.1pp to the headline and 0.15pp to the core inflation rate.”

EUR/USD Technical Levels

Haresh Menghani, Analyst at FXStreet noted, “the (EUR/USD) rebound, however, was short-lived and the pair is now reversing from the mid-point of 1.1100-1.1200 handle. A follow through selling pressure seems to drag the pair back towards 1.1100 confluence support, which if broken decisively should drag the pair immediately towards 1.1070-65 support marking 50% Fibonacci retracement level of 1.0522-1.1616 up-swing. Further, a sustained trade below 1.1100 support would confirm a near-term breakdown, thus making the pair vulnerable to further downside in the near-term.”

“Conversely, a move back above 1.1150-55 day’s peak seems to assist the pair back towards 1.1200 handle, coinciding with 38.2% Fibonacci retracement level. Sustained momentum above 1.1200 handle has the potential to continue boosting the pair in the near-term.”