EUR/USD Extends Thursday’s Post-US CPI Surge Above Key Resistance

Soft Inflation

The US Fed hiked rates by another 75 basis points last week, to 3.50-3.75%, running its most aggressive cycle in at least three decades in order to bring inflation down. It hinted a slower pace at some point, but also ruled out any pause and Chair Powell talked of a potentially higher terminal rate that previously projected. ^[1]

Inflation is the main driver for the central bank's actions and as such, Wednesday's US CPI inflation update, was eagerly anticipated. The report showed that October's CPI inflation was below forecasts and the previous reading.

The Headline Consumer Price Index (CPI) eased to 7.7% year over-year, from 8.2% prior. This was the first sub-8% print since February. Core CPI, which excludes food and energy prices, moderated to 6.3% year-over-year, from 6.36% in September.

Fed Reaction

Wednesday's data are encouraging since they showed a significant dent in inflation, and make the case for a smaller rate hike by the Fed. However, we have seen good prints before, while Fed officials have been clear that one or two data points are not enough for a policy shift. Furthermore, they will have the chance to examine two more inflation reports before their next meeting in mid-December.

Reacting to the report, Ms Mester (voter) acknowledged "some easing" in inflation, but said that it "continues to be broad-based", reiterating her view of that the bigger risk comes from tightening too little ^[1]. Mr Harker on the other hand - who will be a voter in 2023 - was less hawkish, saying that he could pause at around 4.5%, according to Reuters. ^[2]

Market Reaction

The soft CPI report sparked big moves in FX, stock and bond markets, as it shifted expectations around the Fed's tightening path, to a less hawkish direction. The USDOLLAR slumped, while Wall Street had its best day of the year.

CME's FedWatch Tool now prices in a more tame 50 bps increase in December, as far more likely than a 75 bps move. It also assigns the highest probability to rates peaking at 5.00%, from 5.25% previously.^[3]

EUR/USD Analysis

The pair runs its second profitable month, helped by the ECB's aggressive rate hike cycle and the recent deflation of the greenback. Yesterday's report fueled a surge that led to one the best days of 2022 and extends its gains today, eying the 200Day's EMA (at around 1.0390).

Furthermore, it now trades above critical the 23.6% Fibonacci of the 2021 High/2022 Lows decline, which can open the door to a broader recovery towards, the 38.2% level at 1.0609.

On the other hand, EUR/USD has found it difficult to stay above parity recently and the Relative Strength Index already points to overbought conditions, which can contain the advance. As such, we can see renewed pressure back towards this region, but there is a strong cluster of support below it (0.9900-0.9729).

Caution is needed though, as markets continue to look for peak in inflation and a Fed pivot, but such expectations have been disappointed before.