EUR/USD Turns to the Fed & the ECB, After Tuesday’s Jump on Softer US CPI Inflation
Soft US Inflation
Yesterday's data showed that inflationary pressures continued their deceleration in in the US in November, as the Consumer Price Index (CPI) surprised to the downside. Lower energy prices helped, as the Energy index dropped 1.6% compared to the previous month, but was still 13.1% higher on a yearly basis. Food prices remained stubbornly high, up 0.5% month-over-month (m/m) and 10.6% year-over-year (y/y). [1]
Headline CPI eased to +7.1% y/y in November, from 7.7% previously, to what is the lowest print of the year and fifth straight decline since the June 40-year high. Core CPI, which excludes food and energy prices, moderated for second month in a row, to +6.0% y/y, from +6.3% y/y prior.
US Fed - Wednesday
Chair Powell had recently signaled a slowdown in the bank's tightening pace, after a series of historically large 75 basis points hikes that have brought rates to 3.75%-4.00%. On the other hand, he also downplayed the size of the next moves, focusing on the period for which policy will need to remain restrictive and to the terminal rate, which he expects to be higher than previously expected. [2]
Given another soft CPI report yesterday, it will be interesting to see the updated forecasts (SEP) and how much the terminal median rate projection will rise, form the 4.6% of the last forecast [3].
Market expectations have been gyrating around a peak at 5% or 5.25% and after Tuesday's inflation figures, they have shifted to the lesser of the two, according to CME's FedWatch Tool. A downshift to 0.5% hike is priced in for Wednesday, with nearly 80% probability. [4]
European Central Bank - Thursday
The ECB has been late to start tightening its monetary policy, but has been very aggressive since the July lift-off, with two back-to-back 75 basis points hikes over the last meetings.
It has also pointed to further adjustments, but a slowdown in the pace may be in the cards, as various policy makers have appeared ready for a downshift. Fears of a recession could dictate such a shift, while CPI Inflation eased to 10% y/y in November according to the preliminary data, from +10.6% prior final.
The European Central Bank has been vague around the terminal rate, so will also be looking for any clarity around that, while we will also be expecting the updated economic projections.
EUR/USD Analysis
The pair jumped to new six-month highs on Tuesday, after the downside surprise of the CPI report, but steadies today, as markets brace for the upcoming central banks decisions that have the ability to produce outsized moves and will determine the next moves.
After a few failed attempts, EUR/USD took-out the 38.2% Fibonacci of the 2021 High/2022 low slump and now has 1.0787 in its crosshairs, although a strong catalyst will be required for further gains towards and beyond 1.0942.
On the other hand, EUR/USD bulls have been facing difficulties recently and there is risk for sub-1.0500, but negative impact from the upcoming event will needed for the EMA200 to be breached (1.0320-30).
Nikos Tzabouras
Senior Financial Editorial Writer
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.
With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.
References
| Retrieved 14 Dec 2022 https://www.bls.gov/news.release/cpi.nr0.htm | |
| Retrieved 14 Dec 2022 https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20220921.pdf | |
| Retrieved 14 Dec 2022 https://www.federalreserve.gov/newsevents/speech/powell20221130a.htm | |
| Retrieved 03 Dec 2023 https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html |
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