The Eurozone preliminary core CPI rate for April has continued to decrease, indicating a slow pace of inflationary pressure. This trend, along with the widening spread between 2-year and 10-year Eurozone sovereign bonds and US Treasuries, suggests a potential medium to long-term bearish trend on the EUR/USD. The key resistance level to watch is at 1.0740 ahead of the Federal Reserve’s monetary policy decision on 1st May. Since reaching a high of 1.1140 in December 2023, the EUR/USD has been on a downward trajectory, declining by -4.8% in the past four months.
In comparing inflationary trends between the Eurozone and the US, the pace of change is crucial. While the Eurozone core CPI rate stood at 2.9% y/y in March, higher than the US core CPI rate of 2.6% y/y, the trend in the US has been moving upwards. On the other hand, the Eurozone core CPI rate has been decelerating over the past few months. This deceleration continued in April, with a preliminary reading of 2.7% y/y, the slowest pace since February 2022. The divergence in inflationary trends is likely to impact the monetary policy decisions of the European Central Bank and the Federal Reserve, with a weaker EUR/USD forecasted in the medium to long-term horizon.
The widening spread between Eurozone sovereign bonds and US Treasuries suggests a softer tone in long-term inflationary and economic growth trends in the Eurozone compared to the US. This widening trend, particularly significant in the 10-year yield spread, implies a preference for the US dollar over the Euro. Market sentiment derived from these yield spreads indicates a potential downtrend for the EUR/USD pair.
Despite a recent minor bounce from its low on 17th April 2024, the EUR/USD has been trading sideways near its 20-day moving average. The 1.0740 level serves as a crucial resistance point, with a potential breakout signaling a short-term corrective rebound. Intermediate resistance levels at 1.0800 and 1.0850 are key areas to watch for potential price movements in the near future.
The EUR/USD outlook is influenced by inflationary trends and yield spread dynamics between the Eurozone and the US. The bearish trend in the medium to long-term horizon is supported by weakening inflationary pressures in the Eurozone, widening yield spreads, and technical trading patterns. Traders and investors should closely monitor key resistance levels and upcoming policy decisions to gauge the future direction of the EUR/USD pair.