One of the few things that EURUSD typically has going for it to the upside is the strong deflationary forces that pervade its economy. However, today’s HICP inflation print for the Eurozone tells us otherwise. Below, we show US and EUR inflation rates, respectively:

As we can see, the most recent print puts EUR HICP quite close to USD CPI, making its real rate of return even more unattractive. Of course, these inflationary pressures could be transitory, but they are not additive to EURUSD strength for the time being. Since the start of 2021, we have been bearish on EURUSD based on our fundamental outlook that the US would outperform Europe, resulting in inflows to the dollar. Our execution of this view has been augmented by our trading ranges, which we show updated for EURUSD below:

As a reminder:

  • Trading Range: These ranges represent a trading bank within which a currency should trade based on multiple market factors. If we are long- prices above the upside range indicate the asset is expensive, and prices below the downside range suggest that they are cheap and vice versa if we are short.
  • Year-to-Date Returns: This is the price performance of a given currency over the course of the current calendar year, in percentage terms. We also compare the current price to the 52-week high and low for reference.
  • Price Momentum: This looks at cumulative rolling returns for a selected lookback period.  Positive momentum is good if we are long and bad if we are short. 
  • Implied Volatility Discount/Premium: This tells us what the market expects in terms of volatility relative to the history of volatility. If we are long a currency, we typically want market implied volatility to be higher than historical volatility and vice versa if we are short.

Our current read of these technical tools tells us that EURUSD is still attractive to short. Implied volatility continues to paint a picture of complacency, and momentum is definitely in favor of more downside. As the market begins to look past weak European data, EURUSD can bounce. However, our judgment is we are not at that point yet. US data’s relative outperformance has likely only just begun, so there are likely legs left for EURUSD to slide.