EURUSD Bearish Heading Into Tomorrow’s HICP Data

Summary:

EURUSD bearish setup ahead of the HICP inflation tomorrow. The danger is that the data will disappoint and the ECB will be forced to react.

The EURUSD pair trades with a bearish tone ahead of tomorrow’s HICP data. While trying to break the highs, it failed every time so far. The more the time passes, the more likely it is that the EURUSD bulls will take some of their profits ahead of the all-important inflation data tomorrow.

Inflation is a key component in the ECB’s mandate. Committed to delivering price stability, the ECB did everything in its powers to provide monetary support during the COVID-19 pandemic. But when it comes to inflation, the ECB must react too, otherwise, it would jeopardize its credibility.

Inflation in the Euro area is measured by the HICP – Harmonized Index of Consumer Prices. However, just like the Fed, the ECB prefers the core data, the one that excludes volatile items such as food, energy, alcohol or tobacco.

Tomorrow core HICP data is expected to come at 0.9% when compared with the previous 1.2% release. But the pressure is that it will fall even below 0.9%, breaking all-time lows in the 0.5%-0.6% area. If that is the case, the ECB will come under fire to react at its September meeting, even if the market perceives it has limited tools.

Also important, the Euro’s strength is not something the ECB welcomes. A stronger currency makes it difficult to fight lower inflation.

EURUSD Technical Analysis

From a technical perspective, we can say that the EURUSD is on the verge of completing a head and shoulders pattern, albeit an ugly one. The market is currently consolidating on the right shoulder, giving both aggressive and conservative traders the opportunity to participate.

Aggressive traders may consider going short at market with a stop-loss at the highs and a take-profit at 1.16, where the head and shoulders measured move would be completed. Conservative traders may want to wait for the neckline’s break before going short for the measured move. In that case, they need the stop-loss at the highest point in the right shoulder’s formation.