EURUSD – ECJ Ruling and US Inflation, key risks this week

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Baron Rothschild, a nobleman from the Rothschild family was attributed to have once said that “buy when there is blood in the streets“. The quote has gone down the history books as the heart of contrarian investing.

As the markets turn more bearish on the EURUSD, what with institutional banks now talking about revising their longer term forecasts for EURUSD to reach parity (where 1 Euro = 1 US Dollar), this week’s economic releases might just turn the gears on the bearish EURUSD declines which we have seen in the past few months.

European Court of Justice ruling on ECB’s OMT

The first risk comes from Europe, in terms of the European Court of Justice ruling on the ECB’s previous bond buying program, the OMT or Outright Monetary Transactions. At the core of the ruling is the question on the legality of the European Central Bank to dip its hands into purchasing sovereign bond purchases and thus questioning its mandate. The German Constitutional Court as was previously tasked with the issue which then passed it over to the ECJ or the European Court of Justice, which is expected to weigh its thoughts on the issue of bond purchases on 14th January.

A ruling terming it illegal or outside the bounds of the ECB’s mandate could mean that Draghi and team will have to circumvent the legal obstacles in order to find alternatives to direct purchases of the Eurozone sovereign bonds. Whereas should the ECJ rule the OMT as legal and within the ECB’s mandate, expect the QE to be a done deal with absolute certainty.

It is therefore obvious to note that the outcome of the court ruling could swing the EURUSD either ways.

US Inflation

Come Friday and the US Bureau of Labor Statistics will be releasing the December CPI numbers. Consensus points to a negative dip of -0.3% on the headline CPI. So far, the US Dollar’s rally has been largely due to speculative bets on the Federal Reserve’s interest rate hikes, one that was kicked further down the road after April 2015, as revealed by the December FOMC meeting minutes.

A negative inflation print will most likely raise some alarm bells, especially considering that inflation has largely slowed down since the past couple of months, while at one point, CPI dipped to -0.2% for the month of September 2014.

A negative inflation reading will likely see a shift to a cautious approach to long positions in the Greenback as investors start to pause back and weigh the data in the larger perspective.

Technically, the EURUSD closed Friday in a bullish engulfing candlestick pattern with a large down gap pending near the 1.20 level, a psychological support level that was broken quickly followed by a rapid decline making it clear that a retest of this broken support will happen sooner than later.

Adding the technical and fundamental events together, it is well possible that we could potentially see a rebound in the EURUSD this week, should the fundamentals show any inclination of the risks outlined to the currency pair.

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