• EURUSD is dropping towards 1.0000 as higher US CPI may compel Fed to announce a 100 bps rate hike.
• Fed-ECB policy divergence will widen further as ECB may test the waters before going all in.
• Next trigger for the EURUSD price will be the US Retail Sales, which are expected to remain upbeat.

The EURUSD pair has given a downside break of the minor consolidation formed in the initial hour of the Tokyo session. The asset remained lackluster in a 7-pip range and is expected to tumble firmly on an improved inflation report by the US Bureau of Labor Statistics, released on Wednesday. On a broader note, the major is gyrating in a 1.0000-1.0122 range after a downside move from 1.0183.

The US dollar index (DXY) is holding itself around the critical support of 108.00. On Wednesday, the DXY witnessed a steep fall after failing to surpass the 19-year high of 108.56, recorded on Tuesday. The availability of significant offers near the crucial resistance indicates that the DXY bulls need more strength to overstep the 19-year high figure and print a fresh high.

Also Read EUR/USD Forecast: Corrective advance could gather pace once above 1.0120

US CPI has climbed to 9.1%

US Inflation surpasses 9%

On Wednesday, US Consumer Price Index (CPI) climbed to 9.1% as reported by the US agency amid soaring energy bills and food prices. The plain-vanilla annual inflation figure remained higher than the consensus of 8.8% and the prior release of 8.6%. However, the core CPI that excludes food and oil prices trimmed marginally to 5.9% from the former figure of 6% but remained higher than the estimates of 5.7%. One could deduce the fact that goods other than food and oil have shown a minor impact of monetary policy tightening by the Federal Reserve (Fed), although the impact is really minute.

Red-hot US CPI favors 100 bps rate hike

There is no denying the fact that the odds of a rate hike by 100 basis points (bps) have picked significant bets. The Fed needs to tighten its policy more strictly to fix the inflation mess. The inflation rate in the US economy has leveled to the UK's and the investing community is aware of soaring large real income shock fears in the pound zone. Therefore, the Fed could follow the footprints of the Bank of Canada (BOC) and may elevate its interest rates by 100 bps to 2.50-2.75% in July monetary policy meeting.

Recession fears have accelerated further

Signs of recession are escalating firmly as bumper rate hikes by the central banks are a new normal now. Most of the Western central banks have pushed their interest rates above 2% in no time, which has triggered recession fears. The central banks are coming upfront with lower growth forecasts. Currently, the growth story of the US economy and its labor market data is solid which will keep the DXY in the dominant position. Going forward, the release of the US Retail Sales will also provide a glimpse of demand in the US, which is due on Friday. The economic data is seen meaningfully higher at 0.8% than the prior print of -0.3%.

Stable HICP figures in Europe

Dominant nations of Europe reported their Harmonized Index of Consumer Prices (HICP) figures on Wednesday, which were in line with the estimates and their prior releases. The European Central Bank (ECB) has not elevated its interest rates yet and the inflation rates in Germany, Italy, and France are still steady. Unlike the other western countries where inflation rates are accelerating at a decent pace. However, this doesn’t warrant that the ECB could bear a delay in interest rate elevation. The central bank needs to turn hawkish sooner.

Expectations of wider divergence in Fed-ECB policy

As the US economy has revealed a higher inflation rate and has bolstered the odds of a 100 bps rate hike in July. The fact is going to widen the divergence in Fed-ECB interest rate policy. As the ECB has not elevated its interest rate yet, therefore it will test the waters first and won’t hike its interest rates vigorously. The ECB would go maximum to 50 bps rate hike initially and a simultaneous 100 bps rate hike by the Fed will extend their policy divergence significantly.

EURUSD technical analysis

EURUSD price is auctioning in a descending triangle pattern that signals a volatility contraction followed by an expansion in the same. The downward-sloping trendline of the above-mentioned chart pattern is plotted from Monday’s high at 1.0186 while horizontal support is placed at the magical figure of 1.0000.

The asset has surrendered the cushions of the 20- and 50-period Exponential Moving Averages (EMAs) at 1.0054 and 1.0060, which adds to the downside filters.

Adding to that, the Relative Strength Index (RSI) (14) is on the verge of slipping below the range of 40.00-60.00, which will activate a fresh downside impulsive wave.

A decisive move below the magical figure of 1.0000 will drag the asset towards November 2020 low at 0.9880, followed by June 2000 high at 0.9701.

While a confident move above July 8 high at 1.0191 will drive the asset towards June 6 high at 1.0277. A breach of the latter will expose the asset to hitting June 1 low at 1.0366.

EURUSD hourly chart

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