in

EUR/USD continues oscillation below 1.0750 amid a quiet market mood ahead of US Inflation

EUR/USD at risk of fresh decline below 0.9650
  • EUR/USD is juggling below seven-month high at 1.0760 ahead of the United States inflation release.
  • Federal Reserve policymakers are revising their policy projections after a drop in wage inflation.
  • European Central Bank Centeno sees a deceleration in the inflationary pressures from March.
  • EUR/USD is likely to display a volatility expansion while the direction will be based on the US CPI report.

EUR/USD has stretched its consolidation below the critical resistance of 1.0750 in the early European session. The major currency pair is displaying back-and-forth moves as the market mood is extremely quiet ahead of the release of the United States inflation data. The asset is oscillating in an extremely narrow range as investors have shifted to the sidelines.

The US Dollar Index (DXY) is also showing a lack of trading activity, juggling in a narrow range below 103.00 as investors are in a fix ahead of the US Consumer Price Index (CPI) data. S&P500 futures are failing to display a decent action but are holding gains recorded on Tuesday. Contrary to the US equities and USD Index, the return generated by the 10-year US Treasury bonds has dropped below 3.59%.

Fed policymakers in a fix after a drop in wage inflation and economic slowdown

After the release of the Annual Hourly Earnings (Dec), and Manufacturing & Services PMI data last week, Federal Reserve policymakers are in a fix on whether to revise policy projections or to stay firmer with their hawkish viewpoint due to stubbornness in current inflation. Wage inflation dropped to 4.6%, Manufacturing PMI print recorded the lowest since May 2020, and Services PMI witnessed a sheer fall.  

San Francisco Fed President Mary Daly told the Wall Street Journal (WSJ) she would pay close attention to the Consumer Price Index (CPI) data and that both options of 25- and 50-basis points (bps) hikes are open for February monetary policy meeting. A consideration of a 25 bps rate hike for the February meeting when the Federal Reserve has already trimmed its pace of hiking interest rates in December is conveying that Fed policymakers are delighted with the pressure of indicators showing a deceleration in inflationary pressures.

US Inflation to provide a clear picture ahead

According to the consensus, the headline United States CPI (Dec) is expected to continue its declining spree and may drop to 6.5% from the former figure of 7.1%. While the core CPI that excludes oil and food prices might slip to 5.7% from 6.0% reported earlier. Thanks to the declining retail demand, the recent decline in the bargaining power of job-seekers, and a slowdown in economic activities, the street has a lower consensus for the economic data.

The presence of indicators favoring a decline in inflation projections has dented the demand for the USD Index for a while. A note from economists at MUFG Bank claims that only a stronger-than-expected US Consumer Price Index (CPI) would avoid a slide to fresh lows for the USD Index.

Also, Antje Praefcke, FX Analyst at Commerzbank, is expecting inflation figures to remain constant and assumes that this is unlikely to be positive for the US Dollar.

Euro looks confused as European Central Bank sees interest rate peak sooner

The Euro bulls are confused after the release of the Economic Bulletin by the European Central Bank (ECB) and commentary from European Central Bank (ECB)’s governing council member Mario Centeno. Reuters reported that ECB Centeno said on Tuesday the current process of interest rate increases is approaching its end. Centeno expects that the price index will face resistance in January and February but will start falling in March.

Meanwhile, Economic Bulletin published by the European Central Bank is demonstrating a contrary viewpoint. It indicates that wage growth is going to be extremely solid ahead led by robust labor markets that so far have not been substantially affected by an economic slowdown, increases in national minimum wages, and some catch-up between wages and high rates of inflation.

Higher wage inflation is a barrier for central banks in achieving price stability and it might force European Central Bank President Christine Lagarde to continue to keep policy restrictive ahead as households with higher funds for disposal may show bumper retail demand ahead.

EUR/USD technical outlook

EUR/USD is juggling in a range of 1.0712-1.0760 from Monday ahead of the US inflation release. The major currency pair is displaying an inventory adjustment phase around the seven-month high placed on Monday’s high at 1.0760.

Meanwhile, Bollinger Bands (20,2) has squeezed after a juggernaut rally, which indicates a volatility contraction, which will result in wider ticks and heavy volume after an explosion.

 

Written by Andy KIng