US Inflation & Fed Expectations
Thursday's data showed that Headline Consumer Price Index (CPI) jumped 7.5% year-over-year in January and Core CPI surged 6.0% year-over-year, both the highest since 1982.
This caused market pricing around the Federal Reserve's rate hike path to become far more aggressive than previously. At the time of writing, CME's FedWatch Tool projects a larger 50 basis points increase in March, with 95.5% probability. Looking into the end of the year, the highest probability (33.3%) is now assigned to rates standing at 1.75%-2.00% in December.
Persistently high inflation is the main driver of the Fed's monetary tightening. The central bank is widely expected to increase rates next month, but before yesterday's data, the baseline scenario was of a 25 basis points move. We will be looking closely to any commentary from Fed officials around this.
Kneejerk reaction was reasonably on the downside for the pair, as hot inflation strengthens the case for aggressive tightening and helps the US Dollar. Things quickly changed though, as a complete reversal took place, with EUR/USD ending the day flat, after a wild ride.
There is no specific reason behind that reversal, but we presume that many investors were willing to bet that Inflation has peaked, something that we had seen with the previous CPI jump (January 12) when the pair had risen.
Ultimately, the data weigh on the pair, which drops today and breaches 1.1400, despite yesterday's fresh 2022 high (1.1495). Volatility remains high, warranting caution.
The drop below the EMA100 (black line) puts immediate risk to the downside and makes EUR/USD vulnerable to a test of the ascending trend-line from this year's low (at around mid-1.1200s), although sustained moves below this area will likely require fresh impetus.
The common currency catches a breath at the start of the European session and stays above the aforementioned area. As such, a return above the EMA100 that will ease pressure would not be surprising, but we don't think its easy to challenge 1.1523 under the current conditions.
Senior Market Specialist
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.
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