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Summary: The Eurozone's Consumer Price Index (CPI) for August surprised the market by rising 5.3% year-on-year, surpassing the market's expectation of 5.1%. Core inflation, which excludes energy, food, alcohol, and tobacco, did slow down as anticipated, dropping from 5.5% to 5.3% compared to the previous month.

Fundamentals

The Eurozone's inflation rate for August came in higher than expected and remained unchanged from July, indicating that the European Central Bank might consider further rate hikes in September.

The initial reading of the Eurozone's August CPI showed a year-on-year increase of 5.3%, surpassing the market's anticipated 5.1%. Inflation had steadily declined from its peak of 10.6% in October of the previous year. This was partly due to rising food prices, which increased by 9.8% in August, showing some relief from July's 10.8% increase.

In contrast, energy prices continued to deflate, declining by 3.3% year-on-year, though the decrease was less severe than July's 6.1%. Core inflation decreased from 5.5% in July to 5.3% in August, in line with market expectations. The decline in core inflation might provide the ECB with some breathing room, offering more evidence for the viewpoint that there might not be a rate hike in September.

Surveys on business and consumer confidence indicate that the Eurozone economy could be heading toward stagnation due to sluggish demand for goods and overall economic weakness. However, the overall scenario suggests that inflation levels remain higher than anticipated, especially after recent inflation figures from Germany, France, and Spain surpassed expectations.

Overall, while core inflation has eased slightly, overall inflation in the Eurozone rebounded in August. This serves as a warning signal for ECB officials, as they must weigh whether inflation pressures are too stubborn to risk pausing the rate hikes. Although ECB Board member Isabel Schnabel expressed concerns earlier about the economic slowdown, inflation remains a factor of worry as well, intensifying the dilemma faced by ECB policymakers this month.

For ECB officials, the final crucial aspect is the bank's economic projections. The ECB's June economic projections indicate that inflation is projected to remain above the 2% target (expected at 2.2%) by 2025, with potential price pressures being greater than those from food and energy prices.

Technical Analysis

After experiencing an exciting rebound on Tuesday and Wednesday, the EURUSD is facing significant downside risks today. Bulls and bears are fiercely competing around the 1.0860 level.

If the bulls regain control, the asset could find support in breaking above the weekly high at 1.0945. Following this breakthrough, a slight test of the 55-day SMA at 1.0967 might occur before the price reaches the psychological level of 1.1000 and the August high at 1.1064. Once this level is cleared, spot prices may put an end to the downtrend from 1.1275 and continue to build momentum for higher oscillations.

In the event of a current downside reversal that breaks below the previous low of 1.0765, a test of the 1.0700 level is plausible. Further declines might stabilize within the crucial 1.0680-1.0635 range.

Looking at the overall picture, after a two-day consecutive rebound, the EURUSD is showing signs of a significant pullback today. However, considering the consecutive engulfing candlestick patterns over the past few days, the downward movement seems to be nearing completion. As long as the upcoming trading days do not break the previous low again, a rebound after bottoming out is a probable scenario. In terms of trading strategy, it is recommended to buy the dips.

Trading Recommendations

Trading Direction: Long

Entry Price: 1.0810

Target Price: 1.1040

Stop Loss: 1.0662

Valid Until: 2023-09-14 23:55:00

Support: 1.0787, 1.0764, 1.0733

Resistance: 1.0914, 1.0945, 1.0967