EUR/USD Forecast: Breakout imminent on US inflation data

• EUR/USD has extended its sideways grind into a third straight day.
• The pair has the potential to move sharply in either direction.
• US inflation data is likely to trigger a significant market reaction.

EUR/USD has been struggling to make a decisive move since the beginning of the week with market participants remaining on the sidelines ahead of the key US inflation data. The technical outlook suggests that the pair could break out in either direction.

Although Reuters reported earlier in the day that eurozone money markets are currently fully pricing in a 50 basis points (bps) European Central Bank (ECB) rate hike in September, the shared currency is having a difficult time finding demand. Germany’s Finance Minister Christian Lindner said earlier in the day that the German economic outlook was looking fragile. 

In the second half of the day, the US Bureau of Labor Statistics will release the Consumer Price Index (CPI) data for July. The annual inflation is expected to decline to 8.7% from 9.1% in June, while the Core CPI, which strips volatile food and energy prices, is forecast to move higher to 6.1% from 5.9%. 

The market reaction to the inflation data should be pretty straightforward with a strong Core CPI print triggering a dollar rally and a soft reading causing the greenback to lose interest. According to the CME Group FedWatch Tool, markets are pricing in a 66.5% probability of the Fed opting for a 75 bps rate increase in September, suggesting that there is room for a significant response in the US Dollar Index if the data diverges from market consensus. 

EUR/USD Technical Analysis

The symmetrical triangle that seems to have formed on the four-hour chart confirms the view that the pair is about to break out of its range. On the upside, 1.0230/1.0240 (Fibonacci 38.2% retracement of the latest downtrend, 200-period SMA on the four-hour chart) aligns as key resistance. With a weak CPI print, the pair could rise above that level and target 1.0300 (psychological level, Fibonacci 50% retracement) and 1.0370 (Fibonacci 61.8% retracement. 

Significant support is located at 1.0200 (psychological level, 100-period SMA, 50-period SMA). If the dollar regathers strength on a hot inflation report, the pair could pierce through that support and extend its decline toward 1.0150 (Fibonacci 23.6% retracement) and 1.0100 (psychological level, static level)