EURUSD supported as EU lags US in inflation fight
US/EU Inflation Comparison
Source: www.tradingview.com
The chart on the left shows US core inflation and the chart on the right shows Euro Area core inflation. As the respective central banks tighten to control inflation, more progress has been made on the US side.
The ROC for US core inflation is in deceleration territory (blue arrow), whilst the EU core inflation's ROC is still on the acceleration side of zero (red arrow).
It's important for the US ROC to maintain its position and for the EU ROC to dip below zero and hold for the dinsflation process to advance sufficiently.
German/US 2-year Note Spread
Source: www.tradingview.com
Given the lag on the EU inflation front, the ECB will need to be more aggressive than the Fed for at least the medium term. This is reflected in the spread between the German (proxy for EU) and US 2-year notes. This is because short-term borrowing costs react quickly to changes in monetary policy.
The spread shows a series of higher troughs followed by higher peaks and is trending up. I.e., the German 2-year note is rising faster than the US 2-year note, in anticipation of the ECB's relative hawkishness. The spread's RSI is on the positive side of 50 (blue rectangle) connoting an underlying momentum in favour of the German 2-year note.
EURUSD Weekly Analysis
Source: www.tradingview.com
The bottom indicator is the correlation coefficient between the EURUSD and the German/US 2-year spread. Besides for a short breakdown in November 2022 (green ellipse), it is a robust relationship and currently registers as 75%. I.e., the EURUSD is heavily influenced by the short-term fixed instruments, and relative monetary policy.
Like the spread, the EURUSD has charted a series of higher troughs followed by higher peaks and is trending up. Its RSI is also on the bullish side of 50 (blue rectangle), suggesting an underlying positive momentum. The longer the RSI maintains this position, largely dependent on the spread, the greater the probability of higher EURUSD prices ahead.
EURUSD Daily Analysis
Source: www.tradingview.com
1.10 (blue horizontal) is a psychological level and is acting as overhead resistance. This has led to a drop in volatility and the EURUSD consolidating and moving sideways (black rectangle).
The lower volatility is measured by the Bollinger width indicator. It has reached a level (green ellipse) that suggests a swing may be imminent. This is because the Bollinger width shows squeezes in the Bollinger bands, which tend to be precursors to volatility expansions.
In effect, the EURUSD may be readying itself to attack the 1.10 level again. A movement into the bullish channel, between the upper blue and red bands accompanied by an expansion in the Bollinger bands will be compelling
Russell Shor
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.
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