EUR/USD ebbs lower towards 1.1400, finds support at big figure for now as US CPI looms

• EUR/USD continues to ebb lower post-Lagarde’s more measures tone, though has found decent support at the 1.1400 level.
• Focus is on US CPI data on Thursday, which (if hot) could pump Fed tightening expectations, potentially weighing on EUR/USD.

EUR/USD has been trading with a negative bias in wake of Monday’s more measured remarks from ECB President Christine Lagarde that have taken the sting out of the hawkish repricing of ECB tightening expectations that boosted the euro last week. EUR/USD continues to ebb lower from last Friday’s multi-month highs in the 1.1480s and is down a further 0.2% on Tuesday to trade in near-1.1420, though the pair did find decent support at the 1.1400 level.

For reference, Lagarde on Monday said that while the current outlook did warrant policy normalisation with inflation expected to remain stable around 2.0% in the medium-term, there is no need for major policy tightening. Other ECB members have sung a similar tune, with ECB governing council member Pablo Hernandez de Cos on Tuesday saying that any ECB move “has to be gradual”.

Looking ahead, EUR/USD should be wary of US Goods Trade Balance figures out at 1330GMT on Tuesday. However, the massive and seemingly ever-expanding US trade deficit has in recent years played second fiddle to central bank policy divergence (Fed vs rest of G10) as an FX market/USD driver. The main US data focus this week is Consumer Price Inflation data out on Thursday, which analysts say could increase pressure on the Fed to tighten monetary policy at a faster rate.

If that were to be the case, that could boost the dollar versus the euro and risks sending EUR/USD back under 1.1400. Indeed, whilst markets are now pricing more ECB tightening in 2022 (about 50bps) than this time last week, that is still substantially less tightening than is expected from the Fed (well over 100bps). EUR/USD failure to break convincingly above January’s highs in the upper 1.1400s and subsequent double top formation thus may prove a bearish near-term signal.