A Decline In Euro-Zone PMI Would Validate Bearish Euro Technical Outlook

Fundamental Outlook

Inflation in the U.S. is expected to have eased in October to 4.1% from 4.9%, as oil prices have dropped 60% from their peak. If yesterday's record drop in producer prices is any indication then we may see a similar reduction in the headline inflation number, but an increase in core prices. Traditionally easing prices are bearish for the dollar as they beget lower interest rates. However, since the Fed is already anticipated to lower rates to .50% at their next meeting the anticipated increase in consumer purchasing power may create bullish dollar momentum. If that is the case then it would validate the bullish technical outlook for the dollar which is calling for the EUR/USD to fall below 1.2300. Additionally, a rise in core prices could be enough to keep the central bank on hold adding to the bullish dollar story

Despite a false break through yesterday's trade, the Euro remains in a tight wedge formation against the US Dollar. The falling trendline dating back to early October has thus far held, and the Euro/US dollar pair subsequently sees support at recent monthly lows of 1.2400. Given overall bearish momentum, it seems increasingly likely that the Euro will go on to challenge said support through upcoming trade, and a failure eyes April, 2006 lows of 1.2065. Our short-term bearish bias remains intact absent a Euro/US Dollar breach above resistance at 1.2835.

DailyFX

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