Euro under pressure as dollar rebounds

The euro is taking a pause after a massive fall on Wednesday. Currently, EUR/USD is trading at 1.1462, down 0.13%.

Euro slides as US CPI outperforms

US headline CPI in October came in at 6.2% y/y and core inflation rose 4.6%. This was well above the consensus of 5.9% and 4.3%, respectively. Inflation is red hot, as CPI hit its highest rate since November 1990 and core inflation at its highest since August 1991.

For the Federal Reserve, the sharp data means that its inflation headache has just gone up a notch. The US inflation report indicated that price rises were across the board (housing, energy, used cars), and don’t show any sign of cooling off. Inflation could continue its upswing in the coming months and perhaps punch above 7%. The Fed has stuck to its stance that inflation is transitory, but this narrative is looking out of sync with the inflation data.

Another important indicator is inflation expectations, which is carefully monitored by central banks since it can translate into actual inflation. The Fed has maintained its script that “longer-term inflation expectations remain well-anchored at 2 percent”, but this view is suspect, as a New York Fed survey found that 1-year consumer inflation expectations stand at 5.7%. With the US economy showing strong growth and inflation likely to remain high, the Fed may have to re-evaluate its rate policy closer to the markets, which have priced in several rate hikes in 2022.

Meanwhile, the ECB has remained in accommodative mode and ECB President Christine Lagarde has said that there are no plans to raise rates anytime soon. The ECB could be left behind as the Fed and other central banks look to tighten policy, especially with inflation continuing to rise. This could mean further headwinds for EUR/USD, which has dropped below 1.15 for the first time since July.

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EUR/USD Technical

• There are resistance lines at 1.1618 and 1.1669
• EUR/USD is testing support at 1.1515. Below, we find support at 1.1463

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