EURUSD Buyers Keep Coming Despite Weak Inflation Data

Summary:
• EURUSD moves without a clear direction as low market volatility affects the common currency. Both bulls and bears have something to trade here.

The EURUSD pair keeps trading with a bid tone, despite falling from the highs in the last trading day. Buyers keep coming on every single dip, and it feels like bears have to fight for every dip.

Everything surrounding the Euro looks bearish. To start with, the economic data continues to come in weaker than expected (i.e., inflation). Moreover, most European economies are in some kind of a lockdown mode (general or partial). Furthermore, there is no consensus on the Recovery Fund as Hungary and Poland vetoed its ratification.

Problems and more problems – yet the EURUSD trades 1.1835 at the time of this writing, only shy from the high of the day. What keeps the EURUSD bid?

Euro Area Super Core Inflation Falling

Yesterday’s inflation data in the Eurozone shows the MoM HICP inflation well below zero. As a consequence, the core inflation remained at 0.2%, awfully close to turning negative and move into deflationary territory. 

If that is not enough, the super core inflation, one measure of inflation that is closely tied to the Euro area output, fell to a two-year low. Yet, the data seem to not affect the Euro.

However, the ECB will not tolerate such inflation developments. While inflation is not quite a priority during a pandemic, it does matter in the end because the ECB has a mandate that revolves around the 2% inflation target. In other words, the ECB is expected to address this at its next meeting in December.

The expectations are that the ECB will further ease the TLTRO conditions for banks. As a reminder, the interest rate there is already at -1%. However, the central bank ruled out a further cut into the deposit facility rate, something that some Euro traders may find hawkish.

ECB Lagarde Spoke Today

Christine Lagarde spoke today. It was just another of her many speeches and interventions since the October ECB meeting.

She emphasized, once again, that there is no dominance of monetary policy by fiscal policy. This is a concern for many debt-oriented analysts that do not agree with the fiscal easing in most Euro area countries.

One other interesting thing she mentioned was that the PEPP program in place since the COVID-19 pandemic hit the Euro area, was targeted to be just an exceptional tool. And a temporary one.

This is yet another comment to support the Euro strength. The markets may interpret that the ECB will stand ready to remove the PEPP bond-buying program sooner rather than later.

Current Account Surplus a Positive for the Euro

In the meantime, the current account continues to run a surplus. Today’s data took the market by surprise as the surplus exceeded the expected EUR18.1 billion and came at EUR25.2 billion.

The current account surplus has long been viewed as the one thing that calls for a higher Euro when compared to other countries that ran a deficit. Therefore, we can easily add this to the bullish or hawkish Euro arguments.

EURUSD Technical Analysis

Despite the EURUSD strength, one may view the price action from a bearish perspective too. The easier and safer way to trade the EURUSD pair at this point in time is to wait for a break, regardless of the direction. Otherwise, the danger here is to remain trapped in a directionless market that will simply eat from a trading account’s balance via negative swaps.

As such, bulls may want to wait for a break of the rising trendline seen in the chart below (i.e., the black one). If the EURUSD manages to break it, it is already above 1.1950 and will try at the 2020 high of 1.20. To trade it, bulls should have a stop loss at the previous higher low prior to the breakout and a risk-reward ratio bigger than 1:2.

On the other hand, bears may profit from a break below the recent higher low. More precisely, bears would want to short the EURUSD pair on a break at 1.1750 with a stop at 1.1850 and a take profit that respects a similar risk-reward ratio.

Both scenarios require the EURUSD to make a move first. If it does not, having no position is a position – waiting for a trade is sometimes the best trade of them all.

EURUSD Price Forecast