False Breakdown Looks to Potential Catalysts, NFP, Inflation Data

EUR/USD News and Analysis

• Italian inflation data shows encouraging signs while German exports took a hit in November
• EUR/USD in need of a catalyst to shake off the narrow trading range
• Major risk events ahead: EU, US inflation, ADP and NFP
• The analysis in this article makes use of chart patterns and key support and resistance levels. For more information visit our comprehensive education library

The fundamental landscape surrounding the euro zone economy has shifted slightly when compared to the first three quarters of 2022 and that is largely due to the significant reduction in oil and gas prices, which has provided great relief to the mass importer of these commodities.

In fact, the lower costs of oil and gas combined with a relatively mild winter in Europe, has already filtered into the economy via much improved current account balance. The current account records the payments for goods and services, plus investment income and transfers, between an economy and the rest of the world. While this is a broad measure taking more than trade data into account, it helps reveal that the EU economy is attempting to turn the corner and head in the right direction.

Euro Zone Inflation (HICP) with Euro Zone Current Account Balance

Source: Refinitiv, prepared by Richard Snow

However, the picture is far from rosy as German export data reveled a month-on-month contraction of 0.3% for November. Exports to Germany’s top trading partner, the United States, dropped by 1.5% which is par for the course as the U.S. and China contend with growth slowdowns.

EUR/USD Technical Analysis

The breakdown of the narrow trading range on Tuesday proved rather unhelpful in the absence of any significant fundamental or technical driver. Neither US JOLTS or the Fed’s December FOMC minutes were enough to convince the market into sustaining the bearish breakdown.

Current price action has risen back into the prior range where the 1.0615 level provided resistance on the daily candle thus far. However, the economic docket gains traction towards the end of this first week of trading and so we could see another attempt to break out of the range.

A move above 1.0615 brings the top of the range into focus at 1.0720 and 1.0808 not far from there. However, if the US labor market tightens drastically there could be a repricing higher in the dollar which could see EUR/USD decline to the ascending trendline of support (prior resistance) at the intersection of that wide support zone.

EUR/USD Daily Chart

Source: TradingView, prepared by Richard Snow

Major Event Risk

The ADP private payroll data is due ahead of NFP data tomorrow and on the EU side there is EU inflation data due tomorrow after Italy showed slightly lower inflation readings on the monthly and yearly comparisons. Next week US inflation data for December will be watched closely as the Fed continued to stress the effect of inflation to the market’s disbelief as another lower print would mark the 6th consecutive cooler print for the headline figure and 3rd for the core measure.

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— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX