The EUR/USD exchange rate was flat on Friday after a stronger-than-expected European inflation report. It was trading at 1.08500, higher than this month’s low of 1.0600 as focus shifted to the upcoming US inflation data and the European Central Bank (ECB) decision.
ECB decision aheadThe EUR/USD will be in the spotlight next week as the ECB concludes its two-day meeting on Thursday. This will be a crucial meeting since the bank has signaled that it will be the start of the rate cutting cycle.
Analysts have scaled back their expectations for the number of rate cuts to expect after the June meeting since Europe has started to experience some reflation.
Data released on Friday showed that the bloc’s core Consumer Price Index (CPI) rose from 2.7% in April to 2.9% in May. That was a bigger increase the median estimate of 2.7%. The headline inflation, on the other hand, rose from 2.4% to 2.6%.
Inflation in countries like Spain, France, and Germany have been quite strong. Only Italy has seen subdued inflation, with the headline CPI remaining at 0.8%. The key driver for Europe’s inflation is that wage growth is growing at an accelerated pace.
Therefore, economists believe that the ECB will cut rates by 0.25% and then embrace a wait-and-see approach. It will then cut rates if it sees more evidence that inflation is moving towards its 2% target.
The EUR/USD pair is also reacting to the developments in the United States, where data has signaled that the economy is in a stagflation period. Inflation has remained stubbornly high while economic growth has slowed. A report on Thursday revealed that the economy expanded by just 1.3% in the first quarter.
Stagflation is one of the toughest things to handle. A rate cut to incentivise economic growth could lead to more inflation. Higher rates to beat inflation, on the other hand, could stall economic growth as we have seen recently.
EUR/USD technical analysis
The EUR/USD exchange rate has moved sideways in the past few days. It has found a barrier at around 1.0850, which is a few points below the upper side of the descending blue trendline. The pair has also moved slightly above the 50-day and 25-day Exponential Moving Averages (EMA).
It has also formed a symmetrical triangle pattern, which is nearing its confluence zone. Therefore, the pair will likely remain in this tight range ahead of the ECB decision and US nonfarm payrolls (NFP) data. The key support and resistance levels to watch will be at 1.0750 and 1.0985. A move to the latter price will be confirmed if the pair blasts above this month’s high of 1.0900.
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