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ECB Pressured by Deflation Concerns, EURUSD Technicals

by on February 2, 2014 3:04 pm GMT
 

Pressure mounts on the European Central Bank (ECB) as deflationary concerns are brought on by falling inflation contributed to declining energy prices. The consumer-price index (CPI) rose to .7 percent  in 2013, but it is below the central bank’s two percent target. December’s consumer prices rose .8 percent, the fourth consecutive sub-one percent reading. “Although we do not expect the region to fall into outright deflation, the euro zone is becoming increasing vulnerable to such an outcome in case of new unexpected demand shock,” said Nick Kounis, head of macro-research at ABN Amro Bank NV.

The unemployment has remained steady above the 12 percent mark, down from the September high of 12.1 percent. Youth unemployment declined two tenths of a percent to 23.8 percent. The European Union Economic and Monetary Affairs Commissioner Olli Rehn said that unemployment has reached its peak and now is beginning to fall. Although, falling from 12.1 percent to 12 percent is not much of an improvement. The euro zone employment has been consistantly above ten percent since 2010, with only a few prints at 9.9 percent. It has increasing got worse as unemployment has been above 11 percent since June 2012.

EURUSD price action has remained below a descending trend line created by the short-squeeze that pushed to 1.3892, and the euro has not gained much ground since the initial decline of risk sentiment, coupled with euro zone fundamentals, are catching up with the EURUSD. Price action support lies at 1.3450, while the 200 EMA will prove additional support at 1.3426 on the daily chart.

Momentum looks to be increasing as the ADX is beginning to tick upwards with the -DMI steeply sloping upwards.

1D Chart of EURUSD

1D Chart of EURUSD

The same chart overlaid with the Fibonacci retracement to the yearly low of 1.2744 shows that support of the 38.2 percent level corresponds with support near 1.3450/55. If traders begin to show some follow through, a downside target of 1.3310/15 has been given slightly below the low-to-high 50 percent retracement level.

1D Chart of EURUSD with Fibonacci Retracement

1D Chart of EURUSD with Fibonacci Retracement