EURUSD, H1 & Daily
Eurozone HICP inflation fell to just 0.1% y/y in the preliminary reading for May, from 0.4% y/y in April. Prices were down -0.1% m/m, and the breakdown confirmed that ongoing pressure on oil prices continued to be the main driving factor behind the low headline rates. Energy price inflation came in at -12.0% y/y, down from -9.7% y/y in the previous month and compared to +1.9% y/y at the start of the year. Excluding energy, the rate remained unchanged at 1.4% y/y and core inflation also held steady at 0.9% y/y. Food price inflation decelerated somewhat, but at 3.3% y/y remained elevated with lockdowns also disrupting supply chains and harvests. With the economy in recession inflation rates will remain low for a while to come, although food price inflation is likely to remain elevated, and with money supply growth running ever higher and the ECB pumping cash into the economy for the foreseeable future, headline inflation should pick up again once the global economy starts to recover. In the central scenario then protracted deflation is not a major risk, despite the low headline number. However, that is not going to stop headlines and comments about Eurozone deflation, in the coming weeks and months.
EURUSD pegged a fresh two-month high at 1.1137, extending gains after breaking above its 200-day moving average yesterday. The gains are concomitant with the narrow trade-weighted USDIndex falling to its lowest level since March 17th, at 98.09, which nearly unwinds the premium the Dollar has been trading with since the pandemic crisis erupted. There is a risk that the Dollar will rebound on a safe-haven bid. Concerns about the US-China, and more broadly the West-China, stand-off are mounting following Beijing’s implementation of its Hong Kong security law. President Trump will be giving a news conference later today on the US response to China’s democracy-quashing move, which breaks the 50-year “one country, two systems” agreement China made with the UK in 1997. He is expected to revoke Hong Kong’s “special status” (which will have far reaching implications on the territory’s status as a global financial hub) and outline sanctions, among other measures. Beijing is also upping the ante with its long-held desire to reunify Taiwan with the mainland, with the head of China’s Taiwan Affairs Office warning today that attempts by foreign forces to interfere in China’s reunification “will fail.” EURUSD is so far continuing to trade in a broad consolidation range near the halfway mark of the volatile range that was seen during the height of the global market panic in March, which was marked by 1.0637 on the downside and 1.1494 on the upside, the key 61.8 Fibonacci sits at 1.1168.
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Stuart Cowell
Head Market Analyst
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