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Euro edges lower over deflation fears
The EUR/USD pair is trading lower again as traders await eurozone inflation data at 10am (London time), where consensus is for a reading of -0.1% in December. If inflation were to fall, it would be the first decline in eurozone CPI in five years, which would ramp up speculation that the European Central Bank will begin a quantitative easing scheme. Mario Draghi has dropped several hints about buying government bonds, but has always shied away from it; a contraction in the rate of inflation could force his hand.
The euro is also coming under political pressure as the election in Greece later this month could signal a Greek exit, or ‘Grexit’ from the eurozone. The polls are putting the anti-austerity Syriza party in the lead and traders are extremely concerned about this. I feel the EUR/USD will continue to decline as we approach the ECB meeting on 22 January and the Greek election on 25 January.
The downward trend in the EUR/USD puts $1.18 in the cross hairs, and any moves higher are likely to encounter resistance at $1.20.