EUR/USD - Risk Reversals turn negative, focus on inflation differential

EUR/USD confirmed a bearish Doji reversal on Wednesday as the upward revision of the US Q GDP and stellar Aug ADP employment report strengthened the demand for the US dollars and overshadowed the spike in German inflation to 4-month high. 

The daily chart also shows the spot closed below the support offered by the trend line sloping upwards from the June 23 low and July 13 low. The trend line will now act as resistance around 1.1932 levels

One-month 25-D risk reversal turns negative

The risk reversal, which had turned positive earlier this week, fell back to -0.05 yesterday, suggesting the bearish move in the spot was accompanied by increased demand for the bearish bets, i.e. put options. 

Focus on inflation differential

The Eurozone data due at 9:00 GMT is expected to show the consumer price index rose 1.4% y/y in August vs. 1.3% previous. The core figure is seen dropping slightly to 1.2% from the previous figure of 1.3%. 

Across the pond, the Fed’s preferred measure of inflation - core personal consumption expenditures price index [expected 1.4% y/y, previous 1.5%] is due for release at 12:30 GMT. 

The sell-off in the EUR/USD could gather pace if the core PCE better estimates. Moreover, the USD is extremely oversold, while the EUR is overbought. Hence, the pair would be more sensitive to the strong US data. 

EUR/USD Technical Levels

FXStreet Chief Analyst Valeria Bednarik writes, “from a technical point of view, the risk is towards the downside for the upcoming sessions, with the pair trading at its weekly lows below the 1.1900 figure, and with the 4 hours chart showing that the price is now developing below its 20 SMA, whilst technical indicators keep accelerating south within negative territory, coming straight from overbought readings. August 11th high at 1.1846 is the immediate support and the level to break to confirm a bearish continuation down to the 1.1770 region this Thursday.”