EUR/USD: Negative Eurozone inflation is cause for concern for the bulls

• EUR/USD trades near 1.19, having carved out a bearish inverted hammer on Tuesday.
• Markets may begin pricing additional ECB stimulus, courtest of the sub-zero Eurozone inflation.
• ECB may jawbone the Euro to stall the currency's ascent.

The negative Eurozone inflation released Tuesday poses downside risks to EUR/USD.  The currency pair is trading in the red near 1.19 as of writing, having faced rejection above 1.20 on Tuesday.

ECB fails to spur inflation

The Eurozone inflation fell into the negative territory in August, with the consumer price index falling 0.2% year-on-year versus July's 0.4% rise.

Economists had anticipated a softening of inflation. However, markets weren't prepared for the sub-zero print.

The European Central Bank has expanded its balance sheet from EUR 4,500 billion to EUR 6,424 billion in the past 5.5-months to help the economy absorb shocks arising from the coronavirus outbreak. Even so, inflation turned negative in August. While the ECB's stimulus is not having the desired result, the central bank's response to persistent disinflation, if any, is likely to be more stimulus. As such, the bid tone around the EUR could weaken in the near-term.

The ECB may also try to talk down the Euro, which has rallied 6% this quarter alone. "The EUR/USD rate does matter. If there are forces moving the euro-dollar rate around, that feeds into our global and European forecasts and that in turn does feed into our monetary policy setting," ECB chief economist Philip Lane said Tuesday evening in an online conference.

The focus will be on the US ADP Employment report for August and Fed's Williams speech on Wednesday. The dollar may face selling pressure, pushing EUR/USD higher to 1.20 if the jobs data prints below estimates, validating Federal Reserve's recent decision to adopt a more relaxed approach to controlling inflation.

Technical levels