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Inflation Helps Euro Edge Higher as Traders Await ECB Decision

David Becker
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Although EU inflation was expected to drop following the German state numbers released on Monday, the decline in the EU HICP inflation figures was not as dramatic as expected which allowed the Euro to gain some traction. The currency pair has faced pressure ahead of Thursday’s ECB meeting, which will likely be the most important event for the currency markets in 2014.

Eurozone May HICP inflation fell to 0.5% year over year from 0.7% year over year in the previous month. The numbers are slightly below initial expectations but after yesterday’s slump in the German reading markets had been poised for an even lower number. Core inflation dropped to 0.7% from 1.0% and the data will add to the arguments of the doves at the ECB and make a package of measures including a negative deposit rate even more likely.

Eurozone April unemployment dropped to 11.7% from 11.8% in the previous month. Variations across the Eurozone remain very high however. Spanish unemployment is coming down, but remained above 25% in April. On the other end of the spectrum Austria reported a jobless rate of just 4.9%. The overall youth unemployment rate in the Eurozone stood at 23.5% in April. In Italy 43.3% of people under 25 are unemployed, in Spain the number is as high as 53.5%.

As the ECB meeting approached, investors will likely take their chips off the table. The EURUSD will probably consolidated near the 1.36 level, until a clear message from the ECB is sent. Resistance on the currency pair is seen near 1.3627, while support is seen near 1.3590. Momentum is negative but the trajectory of the MACD (moving average convergence divergence) index is flattening as traders square position. The relative strength index (RSI) has lifted from oversold territory and is forming a bottom in the lower end of the neutral range.

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