EUR/USD drops back under 1.1550, eyes YTD lows under 1.1520 as US inflation data looms

• EUR/USD has slipped back under 1.1600 as US inflation data looms.
• The pair already failed on three attempts to break above the 1.1600 level this month, which may be a bearish sign.

EUR/USD has been under selling pressure in recent trade and recently broke to the south of the 1.1550 level. The pair is currently down about 0.4% on the day and is over 0.5% lower than the highs printed earlier in the week of above the 1.1600 level. EUR/USD has now failed on three distinct occasions for far to sustainably break above the 1.1600 level of the 21-day moving average, which on Wednesday resides at pretty much bang on 1.1600. This seems to have been taken as a bearish signal.

Weakness in the EUR/USD comes amid a broad recovery in the US dollar (the DXY is looking to snap a three-day losing streak), which is benefitting from a somewhat risk-off/cautious tone to macro trading conditions. Sentiment during Asia trade was weighed by concerns about inflation after Chinese PPI hit its highest levels in 26 years and amid concerns about the Chinese property sector with developer Evergrande potentially set to miss a $148.5M bond payment due on Wednesday. Sharp downside was also seen in the shares of other developers (Fantasia shares opened for the first time in six weeks and dropped 50% with the company saying it may not be able to honour all debt obligations).

A pick-up in US yields (2Y yield +4.5bps to back above 0.40% and 10Y yield +3bps to around 1.475%) ahead of the release of the October US Consumer Price Inflation report at 1330GMT is also helping the dollar. European yields are more subdued, thus, EUR/USD rate differentials have on Tuesday moved in the dollar’s favour. Meanwhile, the pair has broadly ignored the release of the final German CPI report for October earlier in the session, which came in as expected (headline inflation is running at 4.5% YoY).

EUR/USD bears will be eyeing a test of the recent sub-1.1520 year-to-date lows in case that Wednesday’s US inflation numbers come in hotter than expected. The headline rate of CPI is set to rise to 5.8% in October from 5.4% the month before amid higher energy and used car prices. Traders should look out for any evidence of a broadening of inflationary pressures, such as in the cost of shelter, which accounts for about 40% of the core CPI index. A move above 6.0% YoY would undermine the Fed’s hands-off approach to inflation and could see USD STIR markets bring forward bets on when the Fed will hike rates.