The Eurozone preliminary core CPI rate for April has shown a gradual decline, reaching 2.7% year-over-year, which marks the slowest pace of inflationary pressure since February 2022. This downward trend in inflation is accompanied by a widening spread between the 2-year and 10-year Eurozone sovereign bonds and US Treasuries. The widening of these yield spreads indicates a potential medium to long-term bearish trend for the EUR/USD currency pair.
The EUR/USD has been on a downward trajectory since hitting a high of 1.1140 in December 2023, with a cumulative decline of -4.8% (-538 pips) in the past four months. The key factor influencing the direction of the EUR/USD in the medium to long-term is the path of inflation in the Eurozone and the US. The European Central Bank and the US Federal Reserve play a crucial role in shaping monetary policy decisions based on inflationary trends. Fundamentals currently support a weaker outlook for the EUR/USD in the medium to long-term horizon.
It is essential to analyze the pace of change in inflation rather than absolute levels. While the Eurozone core CPI rate stood at 2.9% year-over-year in March, higher than the US core CPI rate of 2.6% year-over-year, the trend in the Eurozone has been declining. In contrast, the US core CPI rate has seen a slight increase from the previous month. The Eurozone’s inflationary pressure continues to decrease, with the April preliminary reading at 2.7% year-over-year, the lowest since February 2022. This divergence in inflationary trends has implications for the monetary policy decisions of central banks.
The likelihood of the ECB raising interest rates in June or July has been increasing, while the Fed has pushed back its expected rate hike to September due to elevated inflation in the US. The widening spread between Eurozone sovereign bonds and US Treasuries, especially the 10-year spread, suggests weaker inflationary and economic growth trends in the Eurozone compared to the US. This, in turn, supports a bearish outlook for the EUR/USD.
In the short term, the EUR/USD has been trading sideways near its 20-day moving average, signaling indecision in the market. A key resistance level to watch is at 1.0740, with a potential breakout indicating a corrective rebound. Further upside targets include 1.0800 and 1.0850, representing significant resistances. The upcoming US Fed’s monetary policy decision on May 1, with Fed Chair Powell’s press conference, will likely provide clarity on the short-term direction of the EUR/USD.
The Eurozone’s declining inflationary trends and widening yield spreads point towards a weaker outlook for the EUR/USD in the medium to long-term. The divergence in central bank policies between the ECB and the Fed further supports this bearish bias. Short-term price action will be influenced by key resistance levels and the outcome of the upcoming Fed meeting, providing traders with potential trading opportunities based on these factors.