Euro presses base of triangle pattern after dovish German HICP inflation data

Euro vs US Dollar presses against the bottom of a triangle pattern after lower-than-expected German HICP inflation.
Eurozone GDP comes out slightly below expectations and has limited impact on EUR/USD.
German HICP data could provide an early indication of what the ECB will do at next week’s meeting.
Price coils in a triangle pattern within a bullish trend, the 200-day SMA at circa 1.1190 as the next target.

The Euro (EUR) is trading below the 1.1000 handle against the US Dollar (USD), after the release of German HICP inflation data, on Friday. Harmonized Index of Consumer Prices (HICP), the European Central Bank's prefered gauge of inflation, came in below expectations, reducing expectations the ECB will continue hiking rates aggressively at its May 4 meeting.

EUR/USD trades at the lower boundary of a triangle threatening a downside breakout as traders speculate over the outcome of meetings held by the US Federal Reserve (Fed) and the European Central Bank (ECB) next week, at which rate-setters will decide the future path of interest rates. The big question for the ECB is whether it will hike rates by 25 or a bigger 50 bps tranche. The lower-than-expected inflation print in Germany suggests it may be the former. Higher interest rates are positive for currencies since they increase demand from global investors looking for somewhere to park their money; the rate differential between the US and Eurozone is, therefore, a key determinant of the exchange rate.

Other key factors influencing markets are lingering banking crisis fears as First Republic Bank fights for survival. From a technical standpoint, the overall trend is up and the probabilities favor long holders.

EUR/USD market movers

German HICP in April drops to 7.6% when 7.8% had been forecast by economists. MoM HICP rises 0.6%, which is also lower than the expected 0.8% and the previous month's 1.1%. Headline inflation, meanwhile, comes out at 7.2% and 0.4% respectively, also below estimates. Overall the data suggests that Eurozone-wide HICP data out on May 2 could also be lower-than-expected, prompting the ECB to shoose the less aggressive 0.25% rate hike over 0.50%.
Eurozone GDP underperforms: First quarter growth in the region came in at 1.3% compared to the previous year, and 0.1% compared to the previous quarter. The figures were slightly below expectations of 1.4% and 0.2% respectively. Nevertheless, the release has little impact on EUR/USD.
The US Dollar benefits from support after the release of US macroeconomic data on Thursday that saw sticky inflation despite a slowdown in growth.
Fed Funds Futures – a market-based gauge of future interest rates – increased the chances of the Fed hiking its base rate by 0.25% at the May 3 meeting from around 70% to 80%. It also raised the chances of a June hike to above 25%.
Uncertainty remains as to whether the ECB will hike rates by 0.25% or 0.50% at its May 4 meeting. If the latter, the Euro will probably surge.
ECB’s chief economist Philip Lane has said the size of the hike will depend on both the state of Eurozone banks, as assessed by the ECB’s Bank Lending Survey out on May 2, as well as April flash HICP inflation data released on the same day. (German HICP is out on Friday)
The revelation that troubled US regional lender, First Republic Bank – which benefited from a $30B handout from sector peers during the March crisis – is once again in trouble seems to have set off alarm bells that the bank could fail. US government officials from the FDIC, Treasury and Fed are in talks with industry leaders in an attempt to put together another rescue plan.
US recession fears won’t go away and may be deep rooted, as reflected by comments from JP Morgan’s CIO, Bob Michele, who sees deposit flight in the US as more systematically linked to lower-income earners burning through savings to meet the rising cost of living, according to an interview with Bloomberg News.
A key data release for the Euro on Friday is Eurozone first quarter GDP at 9:00 GMT, which is expected to show a 0.2% rise QoQ and 1.4% rise YoY.
German Harmonized Index of Consumer Prices (HICP) for April out at 12:00 GMT could also be key as it will provide a glimpse of inflation in April for the whole region, released on May 2.
A meeting of the Eurogroup of Eurozone finance ministers currently underway may also provide commentary that impacts markets.
The main releases for the US Dollar are University of Michigan (UoM) Consumer Confidence for April, out at 14:00 GMT, also including UoM 5-year Inflation Expectations, and, US Personal Consumption Expenditure Price Index for March at 12:30 GMT, the Federal Reserve’s preferred gauge of inflation.
Personal Spending and Personal Income for March are both also out at 12:30 GMT.

EUR/USD technical analysis: Triangle almost complete

EUR/USD stays below the 1.1000 handle putting pressure on the base of a triangle pattern. Panning out and the broader medium-term uptrend remains intact – and will continue to – as long as the 1.0830 lows hold. Overall the odds favor a continuation of the dominant Euro bullish trend.

EUR/USD: 4-hour Chart

On the 4-hour chart, EUR/USD looks like it has completed a triangle pattern and is pressuring the baseline. Triangles are usually composed of five waves and the final wave E has reached the lower boundary line.

Triangles can breakout in either direction but, given the dominant trend is bullish, the odds partially favor an upside breakout. As such, a decisive break above the 1.1095 year-to-date highs would confirm such a bullish breakout, and a continuation of the Euro’s uptrend to the next key resistance level at around 1.1190, where the 200-week Simple Moving Average (SMA) is located. If the triangle fulfills its full price potential (based the height of the triangle at its widest point extrapolated higher) the Euro-US Dollar could even reach 1.1229.

For the sake of clarity, a ‘decisive break’ could be defined as either a ‘breakout candle’ – a long green bullish daily candle that extends above the 1.1075 highs and closes near its high – or three smaller green bullish candles in a row that break above the highs.

Alternatively, a break and daily close below the key 1.0909 lows would signify a bearish breakout from the triangle, with a target at 1.0805, which in itself could suggest a possible reversal of the dominant trend.

Finally, the Relative Strength Indicator (RSI) in the lower pane, is a mirror image of price, tracing out a little triangle of its own, and so giving no clues as to the underlying strength of the market or in which direction the eventual break will be.

Euro FAQs

What is the Euro?

The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day.
EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

What is the ECB and how does it impact the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy.
The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa.
The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

How does inflation data impact the value of the Euro?

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control.
Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

How does economic data influence the value of the Euro?

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency.
A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall.
Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

How does the Trade Balance impact the Euro?

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period.
If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

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