Brace for Volatility After US Data

The pair will likely see heightened volatility after the CPI data. 

Bullish View

• Buy the EUR/USD pair and set a take-profit at 1.0300.
• Add a stop-loss at 1.0165.
• Timeline: 1-2 days.

Bearish View

• Set a sell-stop at 1.0165 and a take-profit at 1.0050.
• Add a stop-loss at 1.0250.

The EUR/USD price continued consolidating while US bond yields retreated ahead of the latest American and German inflation data. It was trading at 1.0212 on Wednesday morning, which was lower than this month’s high of 1.0277.

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US and German Inflation Data

The EUR/USD remained in a tight range as focus shifted to American and European inflation. Economists expect that German’s consumer price index rose from 0.1% in June to 0.9% in July. This will to a year-on-year increase of 8.5%, which will be the highest point in decades.

Meanwhile, in Italy, analysts expect that the country’s inflation dropped from 8.0% in June to 7.9% in July. This decline is attributed to some government subsidies that it implement recently.

These numbers will come a few days after the European Central Bank (ECB) decided to deliver its first interest rate hike since 2011. It hiked by 0.50% in a bid to fight the soaring consumer and producer inflation in the region.

The European bond market has managed to stabilize after the rate hike. For example, the closely watched spread of German and Spain bond yields has thinned to 2.1%. This situation is mostly because the bank has continued buying bonds from vulnerable economies like Italy and Greece.

The most important catalyst for the EUR/USD will be the latest inflation data from the United States. Economists surveyed by Reuters expect that the headline consumer price index (CPI) dropped from 9.1% to 8.7%. Core CPI, which excludes the volatile food and energy prices, is expected to have increased from 5.9% to 6.1%.

A positive inflation surprise will increase the possibility of the Fed hiking rates by 0.75% in September since the labor market is extremely tight. Such a figure will be bearish for the EUR/USD pair.

EUR/USD Forecast

The four-hour chart shows that the EUR/USD pair has been moving sideways in the past few days. It has remained between the resistance at 1.0276 and support at 1.0131. The pair is consolidating at the 25-day and 50-day moving averages while the MACD is along the neutral point. It is also between the 23.6% and 38.2% Fibonacci Retracement levels.

Therefore, the pair will likely see heightened volatility after the CPI data. In case of a strong inflation data, the pair will likely retest the support at 1.0130. On the other hand, if the CPI data disappoints, the pair will likely rise to the 50% retracement point at 1.0366.

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