Slowing inflation in Europe will cause EURUSD to continue falling

31 May 2023 185
Slowing inflation in Europe will cause EURUSD to continue falling

The EURUSD currency pair, as expected, is making active attempts to consolidate below the level of 1.07. Yesterday's drawdown was redeemed, but today bears began to actively sell the euro. The present situation on the currency market implies a further drop of the EURUSD quotes to the levels of 1.06 and 1.055.


Today, after the news on a significant inflation decrease in France, the price updated the minimum of March 20. Price growth slowed sharply from 6.9% to 6%, while a smoother decline to 6.4% had been expected. Germany's largest regions also reported rapid declines in inflation. Overall figures on price growth in the EU economy will be presented tomorrow. In case strong data is revealed, the EURUSD decline could further accelerate.


ECB officials' statements of intentions to continue the cycle of monetary policy tightening do not provide much support to the euro exchange rate anymore. Expectations of at least 2 more interest rate hikes of 0.25% are already built into the current prices. But even in this case the European key rate will not reach the values that are now set in the U.S. Moreover, the Fed can still afford some rate hikes, which will strengthen the dollar.


In addition to inflation data, tomorrow will be marked by a massive release of cross-country and EU PMIs. The U.S. will also report on its industrial activity. However, the main releases are scheduled for Friday. The labor market report for May will be published on the last workday of the week. Strong data might push EURUSD even closer to the level of 1.055.


If the currency pair remains below 1.07, it might pave the way for further downward moves. A strong resistance range of 1.05–1.055 is still the main target, and the intermediate target on the way to it will be the level of 1.06.


Consider the following trading strategy: 


Sell EURUSD in the range of 1.067–1.07. Take profit 1 – 1.06. Take profit 2 – 1.055. Stop loss – 1.077.


Traders may also use a Trailing stop instead of a fixed Stop loss at their discretion.

This content is for informational purposes only and is not intended to be investing advice.

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