EUR/USD forms bearish flag ahead of Eurozone inflation data

The EUR/USD pair formed a bearish flag pattern after the benchmark German 10-year bond yield turned positive on Wednesday. It is trading at 1.1353 as traders wait for the upcoming Eurozone consumer price index (CPI) and US jobless claims data.

Eurozone inflation data ahead

The Eurozone statistics office published the preliminary inflation data for the block two weeks ago. On Thursday, it will release the final reading. Based on the prior numbers, economists expect the data to show that the bloc’s consumer inflation rose to 5.0% in December while core inflation rose to 2.6%. 

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Like in other countries, the Eurozone is facing inflationary pressures because of the ongoing global supply chain challenges. The ongoing tensions between the US and Russia on Ukraine has also contributed to the crisis by pushing gas prices higher. 

On Wednesday, the EUR/USD reacted to the latest CPI data from Germany. According to Destatis, the country’s inflation rose from 5.2% in November to 5.3% in December. 

The pair also tilted higher after the German government bond sell-off accelerated. The 10-year government bund rose above 0% for the first time in over two years.

The performance is mostly because analysts believe that the European Central Bank (ECB) will start hiking interest rates in September. Earlier on, economists were expecting the ECB to start moving in October. 

Most importantly, there are signs that the ECB will exit its negative interest rate environment by 2023. That will be an important move considering that the ECB has been in this zone for years.

The rising bond yields in Europe offer relief to European investors who have suffered from negative yields in the past few years. However, it is a challenging situation for governments that will contend with rising borrowing costs.

EUR/USD forecast

The two-hour chart shows that the EUR/USD pair declined sharply earlier this week. It fell to a low of 1.1315, which was the lowest level since January 11th. The pair has formed a bearish flag pattern and moved below the Ichimoku cloud. The bearish flag pattern is usually a sign that the pair will have a bearish breakout pattern. If this happens, the next key level to watch will be this week’s low at 1.1315.