(MENAFN- Daily Forex)
Ahead of the release of US inflation data, the most important release before the announcement of the US federal Reserve's decisions, the EUR/USD pair is trying to recover some of its recent losses, which extended to the 1.1015 level. Currently, the pair is stabilizing around the 1.1050 level at the time of writing this analysis.
What is expected for US inflation figures today?
US inflation is expected to slow for the fifth consecutive month. According to the economic calendar, the annual US inflation rate is likely to slow for the fifth consecutive month to 2.6% in August 2024, the lowest level since March 2021, from 2.9% in July. Furthermore, compared to the previous month, the US Consumer Price Index is expected to rise by 0.2%, the same as in July. Gasoline prices are expected to decline, while rents and car insurance may show signs of slowing. At the same time, core inflation is expected to remain unchanged at its lowest level in more than three years at 3.2%. Also, the monthly core inflation rate is expected to remain at 0.2%.Why is the euro rising?
Recently, the euro has been rising against the US dollar (EUR/USD) and other currencies amid strong demand from traders to hedge against expiring options bets. Obviously, this is according to an analysis of the options market by Richard Pace, a market analyst at Reuters. Furthermore, the analyst explains that the prices of forex options that are due to expire soon tend to attract the most cash hedging flows. Also, the price is the level that traders and investors target when they take out an option in the foreign exchange markets. If the EUR/USD price reaches the price level, traders make a profit. However, if it is clear that the price will not reach this level, traders may try to reduce losses by buying or selling at spot exchange rates, which is the exchange rate you usually see on financial websites. The analyst added,“These hedge flows tend to keep forex near options prices,”.
Given the current setup, the analyst says there are billions of euros worth of EUR/USD options due to expire soon. Digging deeper, there were €2.4 billion at 1.1050 expiring on Monday and €2 billion at 1.1040-50 falling on Tuesday. Thursday sees close to €5 billion between 1.1045-55,“which is huge,” the analyst says.
Meanwhile, Forex volatility looks set to ease this week, now that the US jobs report is in the rearview mirror. Concurrently, volatility markets are showing little volatility from Wednesday's US inflation report and Thursday's ECB decision. Ultimately,“If the ECB fails to move EUR/USD on Thursday, options will continue to dominate,” he said.
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The EURUSD pair has formed lower highs and found support at 1.1035, creating a descending triangle on the hourly chart. Technically, the price is testing the support and could be about to bounce or break it soon. The 100 SMA is crossing over the 200 SMA, suggesting that the strongest resistance path is to the upside or that another move back to the top of the triangle at the key psychological level of 1.1000 is in the works. However, the price is still trading below both moving averages, so they could act as dynamic resistance in the near term.
The Stochastic indicator has been signalling oversold conditions for some time, so a turn higher would mean that bullish pressure is back. The oscillator has plenty of room to run before signalling overbought conditions or exhaustion among buyers, so the price could continue to follow the same pattern. Also, the RSI is moving higher to suggest that bullish momentum is underway, and the oscillator needs a lot of ground to cover before reaching overbought territory.
Overall, the EUR/USD pair is likely to take cues from US inflation data and the ECB interest rate statement this week. Technically, a significant drop in borrowing costs is expected, along with potential cuts to growth and inflation forecasts, which could lead to steeper losses for the euro. Furthermore, dovish forward guidance could also keep the euro in a sell-off mode throughout the week.
Meanwhile, the US dollar could extend its rally following the release of last Friday's non-farm payrolls report, as traders appear to be raising expectations when it comes to data that could tilt the odds in Favor of a 0.50% Fed rate cut later this month. Also, analysts are expecting another 0.2% monthly rise in the core CPI, which could lead to a decline in the annual reading from 2.9% to 2.7%. However, a bigger drop could mean a weaker dollar amid stronger expectations of monetary policy easing.
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